Zweig on Investing Vs. Speculating

Every asset, writes Jason Zweig of The Wall Street Journal, “is an investment in some people’s hands and a speculation in others’. So it isn’t what you buy, but rather why you buy it, that determines whether you are investing or speculating.”

Zweig explains that this distinction, which is often credited to legendary investor Benjamin Graham, may be flawed in that an investment can in fact be speculative in nature or actually resemble a hybrid under certain circumstances. He offers an example involving Amazon, which has shot up from $1.50 per share in 1997 (adjusted for stock splits) to past $765 per share with “staggering swings up and down along the way”—and he poses the question as to whether or not this could be viewed as speculative.: “You bought Amazon because you reasoned it would transform the world of retailing, and you hold it—even though the stock trades at more than 175 times its earnings—because you think the company isn’t done with that transformation yet. Your original speculation has grown to resemble an investment. ”

Graham, writes Zweig, advised investors to set aside a portion of funds to essentially separate speculations from investments—like having a “mad money” account of sorts. Rob Arnott, chairman of California-based Research Affiliates, comments, “There’s an element of the speculator in everybody.”

What does Zweig think: “If you buy because you’re afraid of being left behind should stocks keep booming, you’re speculating. If the market’s rise makes you worry instead and look to rebalance your portfolio by selling some of what’s gone up and buying some of what’s gone down, you’re investing.”