Friday, September 16, 2011

Speculation versus Investment

Surprise! Surprise! The majority of people speculate! Whether in deciding to buy a business, house, piece of land, or shares of a company (stocks), people just dump their money into anything in anticipation of harvesting profits in a short period of time. There is absolutely nothing wrong with having the ambition to make money or increase your lifestyle, but people make the mistake of confusing speculation as investing, in the hopes of achieving stellar financial results. 

Speculation simply means throwing money at anything such as stocks or real-estate in hope that someone in the future will buy it from you at a considerably higher price. I emphasize the word hope since speculation is nothing more than just wishing to sell what you have at a higher price than what you bought it for. On the other hand, investing is the complete opposite of speculating. It is the process of efficiently allocating your money, whether for buying a share of a company, business, house, etc, after thoroughly studying the economics behind each underlying venture and determining a fair price for it. True investors never overpay for anything that they put their money into; in fact, at a maximum, they are willing to pay a fair price. In contrast, for speculators, when it comes to price, the sky is the limit. They are willing to pay a million dollars for a hundred thousand dollars house, for example, as long as some future fool will come and buy the house from them at a considerably higher premium. 

Unfortunately, speculation  is the trend when it comes to making money, especially on Wall Street. This new field of speculation has given rise to fancy names for the speculators, who are called "Day Traders." They become the Romeo and Juliette of Wall Street for a short period of time, until this love story tragically dies. TV-channels and major periodicals fall in love with them as they make headlines boasting about profits they are making. They push you to buy stocks of companies they recommend, write books convincing you to follow their "magic formulas," and promise you stashes of money if you take their advice and listen to them. In reality what happens is this--all of a sudden, bam! Vanished! The speculators and their disastrous advice disappear and you never hear about them again. WHY? No, most of them do NOT end up vacationing in Hawaii or some beautiful Island. Actually, they probably spend the rest of their lives in bankruptcy and liquidation courts. If it's too good to be true, it probably isn't true.

-Michael Helou-

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