There is a great deal of media coverage these days about new speculative approaches to making money and new speculative vehicles. For example, day-trading AMC and GameStop stocks influenced by Reddit subscribers and the hoopla around crypto currencies are two of the most popular media reports. Notice that I called these “speculative approaches” and “speculative vehicles.” I did not label these investing approaches or investing vehicles because they are not investing-related.
What’s the difference between speculating and investing? A speculator buys an asset in hopes that someone will pay more for the asset regardless of the underlying value. In other words, a speculator follows the greater fool theory. This theory holds that you can make money from buying any asset (even one without value like Bitcoin or one that is over-priced like GameStop stock) because there is someone who will pay an even higher price. Of course, eventually there are no more fools left who will pay more for an asset and whoever is left holding the asset takes a loss.
An investor buys an asset because she or he believes in the underlying value of the asset. An investor sells it when the person believes the value has changed, the investor believes they can find greater value elsewhere or their risk/reward analysis changes. Benjamin Graham wrote a book about this investor titled The Intelligent Investor.
Which are you: a greater fool or an intelligent investor?