The Difference Between Speculation And Investment

In Latin, the “speculator” is the observer, the scout, the general’s spy. Nowadays, he identifies the one who wants to profit from the evolution of the price of a good or a property title (share, bond, real estate, option, currency, interest rate…). The speculator has no other goal than to make a profit and ideally in the shortest possible time. The speculator is not interested in the quality of goods and securities, nor in the social impact of his decisions (layoffs, poverty, expropriations, famine, …etc), but only in the price gap whether it is rising or falling, having the potential to generate a profit.

On the other hand, the investor will acquire a property or a security with a very long term perspective. In this case, he will make sure that he knows exactly what he is interested in. The investor also differs from the speculator because he often shows an interest in humans. He is interested in the leaders of companies, employees, executives, customers. The real estate investor will be interested in the quality of the materials, the sector, the taxes, etc., but also in the tenants and the maintenance staff. The investor understands that humans are the guardians of his present and future value.

Therefore, the attitude and the length of time allocated to his capital are determining factors. For example, if you do real estate flips repeatedly you are truly a speculator. But if you are interested in multi-dwelling units or buying vacation condos for rent, you become an investor.

Here are the main differences between the speculator and the investor.

Speculator:

  • Is interested in the price differential
  • Wishes to make a quick profit
  • Superficial analysis of the property or title
  • Buys and sells quickly
  • Very frequent transactions
  • Pays regular brokerage commissions
  • Its horizon is calculated in seconds, minutes, hours and days.
  • Acts out of a belief that prices will go up
  • Was mainly based on statistical data, graphs and information obtained from the Internet.
  • Time is its enemy
  • Often buys leveraged, on credit

Investor :

  • Interested in the quality of goods and securities
  • Wishes to achieve regular income and long-term gain
  • Rigorous pre-acquisition analysis
  • Takes an enormous amount of time to decide to buy
  • Makes few transactions
  • Thus, it pays little in brokerage commissions
  • Its horizon is calculated in years
  • His conviction is based on careful research
  • Was based on statistical data, graphs and information obtained from the Internet, but also from in-person visits, interviews, professional inspections and financial projections.
  • Time is his best friend
  • Usually buys with cash, without financing

Although we all have a dominant financial identity, we can certainly be “savers” for our TFSAs and save our capital for a very short-term expense, be “investors” for our RRSPs and somewhat “speculators” for some of our money. The important thing is to think about it, understand these differences and then choose your investments within your limits.

Do you see other characteristics of the investor and speculator?

How do you define yourself?