Gambling, Speculation, and Investment

IN the universal pursuit of purchasing power wherewith to support life and to make it worth living, the person with capital may adopt one or more of three generally recognized methods. He may gamble, he may speculate, he may invest. In some art, science, or system of philosophy it may be true that as a man thinketh, so is he. In the planting and harvesting of capital, however, it is the act, not the thought, which determines what kind of man a man is. Many a wild speculator thinks of himself as a conservative investor. Not a few careful investors actually fear they are speculating, even gambling. For these it may be helpful to enumerate certain acts or methods which satisfactorily distinguish gamblers, speculators, and investors from each other.

The gambler creates his risk. When B says to C, ‘I’ll bet you a dollar it rains to-morrow,’ and C replies, ‘You’re on,’ a risk is created; in fact, two risks. B and C are now under a contingent liability which need never have existed. Day after to-morrow, for no valuable consideration one is going to put his hand into the other’s pocket and take out a dollar. One’s gain will be the other’s loss. Gambling is never described as sound. It has no economic justification.

Speculation differs from gambling in that it involves, not the addition of new risks to an already hazardous enough life, but the transfer of existing risks. When A buys General Electric stock from D, he transfers to D the risk and profit of owning cash. In turn he assumes the risk and profit attendant upon t he ownership of General Electric. No risk has been created and there is a quid pro quo. Both A and D may profit. Investment differs from gambling in exactly the same way. Investment and speculation are both economically justifiable risk-bearing activities. But what distinguishes these two?

The medium used is no criterion. Speculation, investing, even gambling can be done with Liberty bonds. One person buying Wright Aero may be speculating, while another who buys the same stock may be investing. Ample intelligence, the same facts, and the same desire may be the common motive for both. If X, however, puts all his capital into Wright Aero, and Y only one fiftieth of his, everyone will agree that X is speculating and that Y may be investing. Here are illustrated two factors which distinguish investment from speculation: (1) the required degree of safety as affecting the whole fund, not the individual security; and (2) the method by which that degree of safety is obtained.

Speculation may be methodical or unmethodical, sound or unsound. Investment can only be methodical and sound. Otherwise it is speculation. A man’s business is a speculation on his part, and often a most productive one. It is his chosen opportunity for profit, and to it he gives most of his time. Otherwise he fails. Buying and selling stocks constitutes, of course, the greatest popular field for speculation. This enterprise, too, may be prosecuted intelligently or ignorantly. But it offers little ultimate success to the person who does not specialize in it. The operator in this field is interested only incidentally in the growth of a business or an industry. His primary interest is in the advance or decline of prices. Stock speculation of any justifiable sort is a strenuous occupation, requiring constant study and quick action. It is a business for the person with a ticker at his elbow and the latest Moody’s Manual on his knee. It is no pastime for investors.

To bicker over that degree of wholefund safety having which a person should he designated ‘investor,’ and lacking which he should be dubbed ‘speculator,’is futile. There is no way of determining safety content and no way of enforcing adherence to any particular percentage. Suffice it to say that the investor requires a reasonable maximum of safety, he requires it under all contingencies, and thereafter he requires profit.

For safety’s sake the investor usually adopts the principles of averaging, proportioning, examining, and regular inspection. He gives a reasonable amount of time to the study of conditions, of media, and of issues. It is not within his province, however, constantly to study the New York or other stock markets with a view to profiting through buying and selling operations. He is not in the business of making ‘quick turns,’ of trying to profit by ‘ups and downs.’ He does not stand with feet braced, his eye on the fire escape, ready for a race to safety. It is the investor’s business to secure income and appreciation through the operation and growth of sound enterprises, not through their price fluctuations.

When the investor buys a stock he plans to become a partner of successful managers. For his partnership he pays only what he considers a fair price under existing conditions. If a few days after it is purchased someone should offer him more — even a great deal more — than he paid for his partnership, he would not sell it. On the contrary, if a few days later no one could be found to offer as much as he paid for it, he would experience no regret. He is prepared to see the price fluctuate, down as well as up. He has not bought price. He has bought value, which sooner or later determines price.

Large banks, trust companies, insurance companies, hospitals, and colleges are often sound investors. Export financiers are on their boards. Do these institutions sell their bonds and stock in high markets and rebuy in low? They do not. If this can be done safely and successfully over a period of time, why do they not? The answer is that they are investors, not speculators. Their managers are in the business of running banks, hospitals, and colleges, not in the business of chasing prices. Speculation is a poor business to combine with other enterprise.

In his recent annual report the president of a leading life insurance company said, ‘I would not have you suppose that we ever speculate. We do not. We, of course, do not hesitate to sell bonds or other fixed-interest securities when they rise to such premiums that the yield is no longer satisfactory, but when we buy a stock we buy for permanent investment; we buy to keep, and we never sell merely because the market value may have risen to a high figure.’ In these days of extensive corporate publicity, daily quotations, and feverish interest, it is not difficult for the investor to lose his perspective and become a speculator. Unless he has a definite and practical investment plan he may lose his peace of mind and depart from sound policies. If he succeeds, for example, in selling certain of his holdings at a good profit, his advantage is usually short-lived because, if and when prices later fall, he is likely to remain out of the market too long, awaiting still lower prices and seeking still greater profits.

The investor should own securities having an upward trend. To be in and out of the market against an upward trend is not sound, not profitable. Maximum safety and profit, the objective of investors, can be attained only through the liberal exercise of that most uncommon virtue — patience.