If you buy and sell stocks, you may automatically classify yourself as an investor. But it is very important to differentiate between someone who invests in stocks versus someone who speculates in stocks. This distinction is discussed in Benjamin Graham’s book “The Intelligent Investor.”
An investor in stocks is someone whom thoroughly analyzes and understands a business before they choose to invest in a company’s stock. By analyzing a company’s stock, you help protect your principal against serious losses that could arise in bear markets. In addition, investors aspire for “adequate” returns on their investments. Note that investors do not aspire for extraordinary performance, but rather “any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence” according to Graham.
Graham also differentiates investors from speculators by their use of stock market prices. He identifies that investors base the market by established standards of values whereas speculators base their standards of value off the market price. Graham is basically saying that investors do not use the market price of a stock to influence their decisions whether to buy or sell. Investors first look at the company’s underlying business and decide what price they would be willing to buy the stock for. If the company has a market price above this value, investors do not buy into the stock. Speculators, on the other hand, look to the market price of a stock when deciding whether or not they should buy or sell. Simply put, Graham suggests you invest in a stock you would be comfortable owning even if you didn’t have information about its daily market value.
Speculation is tempting. Believe me, I have been guilty of speculating in the past because I believed that I could do well and make money quickly from the stock market. The truth is, I was only making money for my stock broker. Every time I bought or sold a stock I had to pay a transaction fee to my broker. This is why Wall Street hypes up speculators. At the end of the day, they are the ones making away with all of your money. This is another reason why you must shift your thinking from a speculator to that of an investor.
In summary, if you want to experience steady growth of your portfolio and don’t want to face a ton of risks, you must change your mind set to that of an investor from that of a speculator. Remember these three principals of investors: 1) Thoroughly analyze a company and the soundness of their business. 2) Protect yourself against losses. Do this by determining what market price you would buy for a stock, then decide if it is a buy (not the other way around). 3) Aspire for adequate performance. You’re not going to get rich quick by investing.