Practical analysis for investment professionals
15 July 2013

What is the Difference Between Investing and Speculation — And Why Does It Matter? (Forum)

Ever since Joseph de la Vega wrote Confusion of Confusions in 1688, many of the world’s leading investment thinkers have struggled to articulate the difference between “investing” and “speculating.” Does a focus on “safety of principal and a satisfactory return” define investing, as Graham and Dodd contended in Security Analysis? Is speculation best understood as an effort to “forecast the psychology of the market,” as John Maynard Keynes argued in The General Theory? Or perhaps the distinction comes down to long-term ownership of assets versus short-term trading — or the use of leverage and a focus on price action?

The answer matters: As Legg Mason Investment Counsel’s Robert Hagstrom, CFA, pointed out in a recent blog post on the subject, a lack of clarity has created a new class of “investulators,” individuals (and institutions, too, for that matter) who “wander aimlessly back and forth between the worlds of investing and speculation,” often to their own detriment.

To help empower investors to make better decisions, a key aim of the Future of Finance project at CFA Institute, we’ve assembled a panel of leading investment practitioners to discuss the issue in our inaugural online forum, moderated by Jason Voss, CFA. Our distinguished panelists include former Ewing Marion Kauffman Foundation chief investment officer Harold Bradley; investment consultant and blogger Tom Brakke, CFA; Marret Private Wealth President Margaret Franklin, CFA, a former chair of the Board of Governors of CFA Institute; and Legg Mason Investment Counsel chief investment strategist Robert Hagstrom, CFA.

The discussion will run from 15–19 July 2013. If you’d like to share your perspective or pose a question for our panelists, scroll to the bottom of this post and leave us a comment. We’ll do our best to incorporate your thoughts into the discussion.

The Panel

Harold S. Bradley (@HSBtheThird)

Harold BradleyHarold S. Bradley recently retired after more than five years as chief investment officer for the Ewing Marion Kauffman Foundation, where he was responsible for investing the $1.8 billion globally diversified, multi–asset class portfolio. While at Kauffman, Bradley and his colleagues published three noteworthy papers. He coauthored “Choking the Recovery” (2010) with Robert Litan. The paper discussed modern trading and market making systems, high frequency trading, likely causes of the Flash Crash, and possible systemic risk issues raised by the trading and settlement of ETFs. A subsequent paper called “Canaries in the Coal Mine” (2011) examined the rise in settlement “fails” for ETFs and the possible risks to investors in turbulent markets. Bradley and colleagues published a paper called “We Have Met the Enemy . . .  and He Is Us” (2012) that analyzed available data on the long-term performance of venture capital funds and raised questions about current institutional investment practices. Bradley worked for almost 20 years as an equity trader, portfolio manager, and group CIO for American Century Mutual Funds.

Tom Brakke, CFA (@researchpuzzler)

Tom Brakke, CFATom Brakke began his investment career with IDS Financial Services (now Ameriprise), and during his fifteen years there was an analyst, portfolio manager, director of research, creator of new investment products and systems, and founder of the hedge fund unit. Subsequent to that, he was the professional advisor to the Carlson Funds Enterprise of the MBA program of the University of Minnesota and served as a consultant for the independent research portion of the Global Research Analyst Settlement. Brakke provides consulting services to investment organizations and institutional investors, specializing in decision-making processes and the effective communication of investment ideas. He also writes extensively about the industry, on his own websites and for other publications, and is one of “The Experts” for the Wall Street Journal forum on wealth management.

Margaret Franklin, CFA (@MargFranklin)

Margaret Franklin, CFAMargaret Franklin is the president of Marret Private Wealth Inc., a division of Marret Asset Management. Franklin has more than 20 years of institutional and private client investment management experience. She has worked at Barclays Global Investors, State Street Global Advisors, and Mercers in senior positions. In 2002, she moved from the institutional side of the business to work with private clients. Franklin is the former chairman of the board of governors of the global CFA Institute, is a past president of the Toronto CFA Society, and is a CFA charterholder. She has a BA in economics from McMaster University.

Robert Hagstrom, CFA (@RobertGHagstrom)

Robert Hagstrom, CFARobert Hagstrom, CFA is chief investment strategist at Legg Mason Investment Counsel and the author of the New York Times best-selling The Warren Buffett Way. He is also the author of The Warren Buffet Portfolio: Mastering the Power of the Focus Investment Strategy; The Essential Warren Buffett: Timeless Principles for the New Economy; NASCAR Way: The Business That Drives the Sport, and The Detective and the Investor: Uncovering Investment Techniques from the Legendary Sleuths. Robert’s new book is titled Investing: The Last Liberal Art (second edition) published by Columbia Business School.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Len Costa

Len Costa was head of communications and content strategy at CFA Institute, where he oversaw global social media, mobile products, and digital content strategy. He previously served as director of interactive media at the Institute for Private Investors (IPI), a peer networking organization for ultra-high-net-worth families and their advisers. Costa also wrote a private wealth column for the Financial Times and, prior to joining IPI, he held senior editorial positions at Institutional Investor and Worth magazines. His writing has also appeared in Forbes, Fortune, Slate, and The New York Times. Costa holds a BA from the University of Virginia, a diploma in French language from the Université de Paris, and a master’s degree in international affairs from Columbia University.

27 thoughts on “What is the Difference Between Investing and Speculation — And Why Does It Matter? (Forum)”

  1. vishal says:

    Investing is all about converting your money in order to get return with some size of risk..speculation is all about using money to earn abnormal returns with fixed size of risk..

    1. Hi Vishal,

      Thank you for your comment. With your permission I may work it into our conversation.

      With smiles,

      Jason A. Voss, CFA

  2. Stephen Gunawan says:

    I think the differences between investing and speculation can go down to each person: how sensitive and risk averse are you? if you are very savvvvvvy and soooo risk averse, maybe even put your money on “risk-free” government bond investments is speculative enough to make you sleepless at night. However, it would be wonderful if there are any clear definitions about the differences between investing and speculation.

    1. Hello Stephen,

      Thank you for your comment, your participation is appreciated!

      With smiles,

      Jason A. Voss, CFA

  3. Roy says:

    ‘The Theory of Investment Value’ John Burr Williams (1997)

    “As will be shown later, the longer a buyer holds a stock or bond, the more important are the dividends or coupons while he owns it and the less important is the price when he sells it. In the extreme case where the security is held by the same family for generations, a practice by no means uncommon, the selling price in the end is a minor matter. For this reason, we shall define an investor as a buyer interested in dividends, or coupons and principal, and a speculator as a buyer interested in resale price…To these speculators dividends are inconsequential because they hold for too short a time to receive many dividends.”

    1. Hi Roy,

      I see that you have dug deep into the investment lexicon. Not many folks know John Burr Williams. Parenthetically, you might be interested in a text that CFA Institute co-published with John Wiley that my fellow Content Director, David Larrabee, CFA, and I edited called “Valuation Techniques.” In the introduction Gary Brinson comments extensively about John Burr Williams.

      Separately, thank you for your answer I will ensure that it enters the discussion today!

      With smiles,

      Jason A. Voss, CFA

  4. Simon Njuguna says:

    Investment is a systematic method of wealth creation whereby an individual/institution places its funds in an undertaking that endeavors to add value while on the other hand, speculation is where you place your funds in any undertaking without necessarily taking into consideration the risk or value addition concept.

    1. Hello Simon,

      Thank you for sharing your insights on the topic! I will add your remarks to the growing thread.

      With smiles,


  5. Roy says:

    Here’s some recent analysis from Dimson,Marsh and Staunton (based on +100 years of global equity returns).
    “Over the long run, real returns accrued largely from dividend payments, but Dimson, Marsh and Staunton (2000, 2002), Arnott and Ryan (2001), and Ritter (2005) highlight the time-series and cross-sectional variation of global equity premiums.”
    “We show that, historically, for the world equity index, the annualized mean dividend yield has been 4.1%, while real dividends grew by 0.5% per year and the annualized expansion in the price/dividend multiple was 0.4%.”

    1. Hello Roy,

      Thank you for including these links for other readers.

      With smiles,


  6. Roy says:

    Patient passive investors.

    “I have little confidence even in the ability of analysts, let alone untrained investors, to select common stocks that will give better than average results. Consequently, I feel that the standard portfolio should be to duplicate, more or less, the DJIA.”
    Ben Graham (Warren Buffett’s mentor) in ‘The Memoirs of the Dean of Wall Street’ (1996).

  7. Lance Durham says:

    Investing involves tortoise-like steady returns; Speculation involves hare-like volatile returns.

    Investing is based on Income and Sustainable Growth; Speculation is based on a private Capital Appreciation expectation minus the Sustainable Growth.

    Investing involves sober evaluation of the safety of principal; Speculation does not.

    Investing makes every effort to limit the downside; Speculation does not.

    Investing relies on the world basically functioning as it has and continues to function; Speculation relies on the world changing to look like your unique prediction.

  8. Hello Lance,

    Thank you for adding your views to the flow of the conversation. Thank you also for following; I hope that it has been interesting to you.

    With smiles,


  9. Roy says:

    Old macdonald had a hedge e i e i o
    The Commodity Futures Trading Commission in the US (“CFTC”) defines a speculator as: “a trader who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements”…The benefits of speculation are fourfold: aid in price discovery; facilitate risk transfer; increase liquidity; and smooth out pricing anomalies in correlated markets.

  10. Hi Roy,

    Your contributions to the discussion have been valuable – thank you for continuing to feed information into the conversation.

    With smiles,


  11. Hardik Kalaria says:

    How do upcoming value investors like me find work in this industry? Everyone likes to hire by reference only! Any suggestions?

  12. Roy says:

    My parting shot.

    “During the French Revolution such speculators were known as agitateurs, and they were beheaded.” Michel Sapin, former French Finance Minister, on speculative attacks on the Franc.

  13. Hello Hardik,

    What an analyst has to offer to an employer is largely abstract and creative thinking skills. These skills are intangible and difficult for recruiters to assess. That’s why businesses tend to recruit from the same schools decade after decade: reliability of the candidate. This is also why they prefer people who have experience. You see, they are seeking to make tangible what is difficult to assess otherwise.

    So to get your initial employment you must focus on providing concrete evidence that you have these skills. Getting a CFA charter is one powerful way of making your skills and commitment to the industry concrete for a prospective employer.

    When I began my career I created a website that included: examples of my own personal research on companies, book reviews, a list of my skill set, and so forth. This will sharpen your own skill set.

    Track how your recommendations do by noting the prices of assets on the day that you recommend them and then how you do over time. You MUST be honest with yourself, otherwise you won’t learn anything. This is more for you than for your future employer. Markets provide a valuable feedback mechanism for assessing your skill set. The beautiful and terrifying thing about investment management is that the results of your performance are measured objectively. You either did well for people or you did not.

    I have a friend who took a similar approach as me to getting work. He sent his research reports to investment firms every single month for two years and eventually got a job interview. By doing this process he taught himself to be an analyst.

    Another tip is to read, read, read, read. Read investment texts. Read texts on geopolitics. Read texts on mergers and acquisitions. Read economic texts. And most of all read the news every single day and begin to develop an opinion about the news and how it affects different countries, industries, businesses, and individuals. The most important skill for any investor is: understanding information. Who understands information the best does better. Who understands information the best and acts decisively on that information wins the day.

    Spend some time figuring out who you are as an analyst. This is critically important. Why? If your natural strengths as a thinker make you a good trader then you will be very frustrated working at a deep value, long-term focus money management firm. You want to develop skills that accentuate your existing talents and skills that compensate for your shortcomings.

    Expect this process to take a lot of time.

    Hope that helps,


    1. Hardik Kalaria says:

      Thanks Jason. I am awaiting my CFA results. But that’s great advice. Will surely keep everything you said in mind.

  14. Sebastian Miralles says:

    Personally I use a mixture of Hyman Minsky and Graham & Dodd.

    An investment should earn its return from it’s own income/cashflow stream. Roughly equivalent to Minsky’s defintion of hedge finance. The main characteristic is that the return comes from the asset itself, so unlike Graham future growth can be reasonably considered (though growth is very hard to successfully project).

    A speculative investment will provide a return only assuming a change in external factors not instrinsic to the asset itself. Mainly, an increase in the pricing multiple / decrease in discount rate / increase in the cost of carry. (commodities, venture capital, a lot of buyout transactions, etc)

    A ponzi asset produces no significant cashflow or benefit and can only generate a return if a thrid party purchases it a higher price. Think of art, wines, tullips, etc, but even conventional assets classes can become ponzi assets if the pricing gets completely out whack with the underlying (the dot-com bubble comes to mind)

    1. Hello Sebastian,

      Thank you for sharing your point of view and for expanding the discussion with your inclusion of the Ponzi vehicles. Your views are closely in alignment with Robert Hagstrom’s and he has written extensively about them if you want more information : )

      With smiles,


  15. Amine Benali says:

    Investing requires speculating. Investing as a contributor said on a different panel is outlaying capital. Speculating in making a guess (informed or otherwise) about the future. Investment decisions take place in a market place with incomplete information. Making a guess about the future is thus a necessary condition for completing the investment function.

    From some of the comments, it appears the question raised tries to label investing as positive and speculating as negative. When one adopts the distinction as implied in the original question, a discussion of risk is required to support the distinction (high risk bad, low risk good). I believe this is not a constructive way to think about the investment function. Investment professionals have acquired and utilize tools necessary to make informed decisions with limited information. To throw out speculation entirely is to throw an entire body of knowledge in probabilities that civilization has developed over centuries and that a number of physical sciences rely on to make advances in their respective fields.

    The distinction should be between investors who take the time to formulate and articulate an investment philosophy and process and spend considerable effort in understanding their investment opportunities before committing capital, and those who don’t. During times of volatility the first group is likely to remain calm and let their numbers guide them; the second group is likely to head for the exit at any cost.

    As with all professions, being honest with oneself and others is a sure way to remain on the positive side of any distinction.

    1. Hello Amine,

      Thank you for what you have written above. I especially like you highlighting that people can speculate without that being a negative endeavor. My own views, now revealed, post serving as moderator, are:

      1. The future is unknowable for both the investor and the speculator.
      2. Money may be made both investing and speculating.
      3. Investing and speculating are essentially the same activity: risking current capital for the hope for more in the future.
      4. Investing puts the greater proportion of mental responsibility on left-brain capabilities. Whereas, speculation puts the greater proportion of mental responsibility on right-brain capabilities.
      5. Those undertaking the activity described in step #3 should identify what are their personal strengths, then they should develop tools that exalt their consciousness so that they are more effective as either investors or speculators.
      6. Most of the differences between investing and speculating are easily described using common frameworks of different return expectations, risk tolerances, and investment time horizon preferences.

      I actually really liked every panelist’s contributions to the discussion. I liked Hagstrom’s Cartesian grid of intelligent/unintelligent investing/speculating. I also liked Harold and Tom’s emphasizing the relativistic aspects of the discussion.

      For Harold, he emphasized that behavioral biases negatively effect capital allocations vis-a-vis return, risk, and temporal differences. I would point out that there is no reason to think that these behavioral biases would more effect any category of the intelligent/unintelligent investor/speculator framework.

      For Tom, he thought that different market environments distorted notions of investing and speculating. I would argue that there is an absolute definition for these words and that is the value in having the discussion, so that when the market environment relatively distorts the absolute definitions then investors and speculators can better characterize the environment, then use this as decision making information.

      I also really liked your emphasizing the importance of being honest with oneself and others. Well said!

      With smiles!


  16. Roy says:

    Yes, a company’s revenue, costs, cost of capital etc are all significantly affected by external factors. Customers, suppliers, input prices, financiers etc are in turn affected by more external factors like central banks, the government, the weather etc. Even physical phenomena like the climate can be influenced by things like consumption and environmental regulations.

    As so goes the circle of life… Lots of assumptions made.,The-Worst-Predictions-Ever

    “Prediction is very difficult, especially if it’s about the future.” Nils Bohr

    On the ponzi point, some companies in their early days went on without producing much cashflow or benefit for a while before they became succesful.,28804,2097462_2097456_2097474,00.html

    1. Hi Roy,

      Thanks for your continued contributions to the discussion!


  17. Fung Chee Fui says:

    Thanks for the comments of the panelists and commentators here. I would like to add my views here.

    Another difference between investing and speculation is the definition of risk management. Investors emphasize on the movement of intrinsic value, whereas speculators care about pricing fluctuation (Beta/Sharpe/etc).

    The panelists’ comments are highly sophisticated, which is not understandable for the laymen. As a investment professional too, I would still prefer to look into investing-vs-speculation a simple context. Investing = buying a cow that milks every day and expect the value of cow to increase in the future; speculation = buying a cow and expect to sell next day/week/month/year by guessing how other buyers think.

    As pointed out by many readers, speculation is all about guessing work. Speculators predict — with and without reasonable basis — the future growth, future market valuation, future economic environment, future human behavior, future bla bla bla. It is about predicting the future, in which the probability of error is at best 60-40 (normally 50-50). Therefore, speculation is generally risky, hence a speculating-CIO normally needs a risk management department sitting beside his/her office.

    Investors, on the other hand, don’t predict. Investors look into what an asset can produce and conservatively estimate the intrinsic value over the productions. At times, investors do predict future growth but with reasonable assumptions (conservative is the key). Any “investor” who predict growth without basis or with unreasonable basis should move to the speculation camp.

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