The nightly news and the blogosphere are all abuzz about the current economic crisis. Has the market hit bottom yet? Where are the speculators putting their money now? What does Warren Buffett (a.k.a. the Oracle of Omaha) think about all this? The next financial catchphrase may well be “WWWD?” (What Would Warren Do?)
We think that Warren would agree with our position that a clear understanding of the difference between investing and speculation is essential. And an understanding of both concepts will have a profound impact on the way you make decisions – about a lot more than just money.
Certainly, when you think about “investing” in real estate, you are actually speculating, considering that the return you will get from the property is anything but certain. When you think about “investing” in the stock market for the long term, you are actually speculating, considering that there are no guarantees you will get the expected dividend or that you will be
able to sell the stock at the higher price you thought you would when you purchased it.
When you “invest” in precious metals as a hedge against inflation, you are actually speculating, since you have no idea if indeed inflation in the future will be high enough to attract further buyers into the metal and thus push the prices much higher satta matka.
But, the confusion between investment and speculation is not just confined to financial assets. What about your own business? When you were looking for start-up capital, did you ask your partners, family members or friends to consider it as an investment or a speculation? If you put 100 percent of your own money, did you and your conscience agree that this was going to be a “great investment?”
A curious dichotomy
Most people are risk averse by nature, yet these same folks unknowingly take on risky financial commitments and life endeavors, when they should not. Generally this comes from failing to understand the difference between an investment and a speculation- or confusing the latter with outright gambling.
We dream about saving for retirement, hoping for a comfortable “nest egg” by putting aside funds in U.S. Treasury notes or corporate bonds of highly- regarded corporations. But as we have learned, the sad reality is you won’t become rich if you buy instruments that barely return a cash flow above the inflation rate, (if that). And recent events have made it clear that the corporate bond market is far from a sure thing.
The lyric to an old song says, “Everybody wants to go to Heaven, but nobody wants to die.” There is a parallel when it comes to taking risks. We are averse to risk, but at the same time want to become rich without taking on too much risk. That dichotomy creates an inherent conflict, between managing our financial assets and our life.
Wake up and smell the coffee! You simply cannot have it both ways. If you want to become rich in life, forget about investing in sure things- you need to speculate. Be prepared to win, but also be prepared to lose. Recognize that life is a game of chance and get accustomed to living with that uncertainty. But do it wisely.
Speculators fuel recoveries
These days, we face an uncertain economy, not only in America but across the world. Yet, in a very real sense, speculators are the best thing that can happen to an economic recovery. Speculators will take risks the rest of us cannot afford, or stomach. And at the very time when fear is afoot in the land, and people are struggling with a broken economy, speculators are the real “white knights” who pump liquidity into the economic recovery – in order to ride the next uptick into profits.
Like it or not, we are surrounded by speculation in an ever increasing complex globalized, Internet connected, fast-paced world. That is a “good thing,” as Martha Stewart would say. And when you understand the bigger picture, you’ll have more reasonable expectations and a better handle on what you’re actually doing and what you can expect with the use of your money and your decisions in life.
If you choose to take some risk – and we encourage you to take some risk – let it be rational, so that you don’t overpay for something, or confuse an investment with what actually is a speculation, without being compensated enough for taking that higher risk.