Who The Hell Are You? (1)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

Although I would probably be laughed at by most serious cinema critics, I like Arnold Schwarzenegger movies.  Arnold is best known for the Terminator trilogy in which he is a relentless robot from the future; however, in one of his lesser known roles, he played a special ops commando battling an alien in the 1987 sci-fi movie, Predator.  At the end of the movie, he, of course, has defeated the grotesque alien.  Standing over the dying creature, he asks it, "Who the hell are you?"  The extraterrestrial, with its last dying breath, looks at him and repeats the question back to him.  Schwarzenegger's character survives the subsequent explosion and lives to fight another day.

You should ask yourself that very same question with respect to your investment strategy.  In your forays into the stock market, are you an investor, a speculator or a gambler?  Philip Carrett, Benjamin Graham and Al Frank each discuss these distinctions in their books.

I posted the following excerpt in my April 4th blog, but it is worth repeating.  Philip Carrett viewed investors, speculators and gamblers on a continuum.  In his book, The Art  of Speculation, he distinguished between them as follows:

"Your articles deal with speculative investments rather than with speculation." said an astute observer of both fields of activity when he had read the greater part of this book in serial form.  To this charge the writer was forced to plead guilty.  After all, it is by no means easy to draw the line between investment and speculation, between speculation and gambling.  If one is to discuss the topic of speculation and perhaps induce some readers to attempt it who might otherwise have left speculation alone, it is much more helpful to the average reader, much less dangerous to the reader who might misinterpret what he reads, to discuss the sort of speculation which is on the borderland of investment than the more dangerous and less useful type of speculation which borders on gambling. *

Mr. Carrett believed the difference between investment and speculation was the investor's motive.  Was the investor looking for quick profit (speculation) or for long term appreciation (investment)?   

Benjamin Graham was strict in his distinction between investment and speculation.  In the opening paragraphs of The Intelligent Investor, he said:

An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.  Operations not meeting these requirements are speculative. **

He did concede that there could be intelligent speculation as well as intelligent investment; however, he did not waiver from the differences he saw between the two forms of market operation.

Next week marks the first year of this blog, so there will be a special post.  In two weeks, we will see how Al Frank distinguished between investing and speculating.

* Quote from the edition of The Art of Speculation by Philip L. Carret published in 1995 by Fraser Publishing Company.

** Quote from the revised edition of The Intelligent Investor by Benjamin Graham published in 2003 by HarperCollins Publishers.

Comments are always welcome.