How to distinguish between investment and speculation may not be important to people today. But for Benjamin Graham, it's very important. In the first article to readers in the first edition of Securities Analysis, Graham pointed out at the beginning that the focus of Securities Analysis is to "explain how to distinguish investment from speculation and how to establish a robust and feasible security test." The reason why Graham is determined to distinguish between investment and speculation is closely related to the background of his creation of Securities Analysis.

The background of creating "Securities Analysis"

When Graham wrote Securities Analysis, he had to challenge the widely accepted argument that "there is no end to the financial crisis"; and when Securities Analysis was published, he saw the old stubborn disease in investors-"money burns pockets leak, once you have it, don't keep it." As a result, Graham believes that only conservative investors should be constantly reminded to learn the lessons of the collapse of financial markets; only when investors invest with vigilance are they likely to make sound choices.

In Graham's time, the line between investment and speculation was blurred, and many views were specious. For example, people at that time thought that buying bonds was the investment, while buying stocks would only be regarded as speculation, because they thought bonds were the only sound investment vehicle. Because of this, Graham spends a lot of ink on bond investment in Securities Analysis, which makes the book full of distinctive marks of the times.

Graham criticized that an insecure bond is not only an out-and-out speculative tool, but also an unattractive speculative tool. On the other hand, if a highly safe common stock has the possibility of making a profit, if it is classified as speculation, it does not make sense in any case. Some particularly good common stocks are ideal investment vehicles, and the people who buy such shares should also fall into the category of investors.

Thus it can be seen that "investment" at that time was such an abused word that even the boldest and most disorderly speculation became an investment. The prevalence of speculation and the fact that banks speculate in the name of investment make the vast number of market participants turn huge profits into heavy losses.

In this way, Graham encountered greater difficulties when he tried to define investment and speculation. And, because cynics will cynically say that investment is a successful speculation, while speculation is an unsuccessful investment. It is not difficult for Graham to make a strict distinction between investment and speculation, but it is difficult to lose money even if he invests according to proven rules.

Graham analyzed that the "crazy state" of the common stock market in the 1930s was actually the result of the serious misuse of the soundness principle. If someone can strictly follow the old common stock investment rules, they will sell stocks at the beginning of the bull market and then stay away from the market until the stock market crash in 1929. Return to the market when the price has investment value relative to profitability and other factors.

As long as he can follow the old and conservative rules of investing in common stocks, he has enough profit opportunities to make up for the risks he takes-an advantage that the average bond investor does not have. The biggest weakness of this investment code is that it is difficult to strictly follow them in the speculative environment of 1928 and 1929.

The definition of investment and speculation

In Graham's case, investment operations are defined as operations that, according to in-depth analysis, promise principal safety and satisfactory returns. The operation that does not meet this condition is speculation. The "investment operation" mentioned here is not "a security" or "a purchase". It is groundless to think that all stocks have the characteristics of investment in nature.

Price is usually an essential element, and a stock may have investment value at one price, but not at another price level. The investment may be aimed at a group of stocks, and it is not safe to buy only one of them separately. In order to meet the minimum investment requirements, diversification is necessary to reduce the risks involved in individual stocks. But in any case, stocks suitable for investment are as safe and stable as bonds, and stocks that can withstand this selection tend to perform well and have the possibility of appreciation that bonds do not have.

The so-called "in-depth analysis" refers to the study of facts according to security and value standards. Simply because of its good prospects, it is recommended to buy shares at 40 times earnings, such an "analysis" will obviously be abandoned because it is not thorough enough. The so-called "security" is not absolute and thorough. It refers to the protection of investment from losses under all normal and reasonable conditions or changes. Unless there is a slim accident, safe stocks must be good value for money in the future.

Research and experience show that as long as there is a high probability of loss, it is speculation. The so-called "satisfactory return" has a broader meaning than "sufficient income". It includes not only current interest and dividend income, but also capital appreciation or profit. "satisfaction" is a subjective term that covers any rate of return or amount of return, no matter how low, as long as investors invest reasonably and are willing to accept it.

Investment must always take into account the price and quality of securities. Strictly speaking, there is no absolute sense of "investment securities", that is, regardless of the price, the purchase of the securities is an investment. If the stock of a strong company cannot guarantee the safety of the principal in the sense of any rational investment because its price is too high, then it must be regarded as speculation. Investment operation can be proved to be reasonable both qualitatively and quantitatively.

Although investment is based on the past, and speculation is mainly based on the future, both investment and speculation must go through the test of the future. They are subject to the ups and downs of the market, and their success is judged by future results. In essence, investment in the future is a risk to guard against, not an opportunity to benefit from it. Investment is certainly better if future investment conditions are improved, but the investment decision itself cannot be based on the expectation that future conditions will improve. On the contrary, the basis and basis of speculation may come entirely from the judgment that there will be different developments in the future.

In order to more clearly specify the special meaning of investment and speculation, Graham divides investment into: ① business investment, which invests money in only one enterprise; ② financial investment or general investment, usually referring to securities; and ③ risk aversion investment, which refers to securities with less risk, which has priority claim to profits or sufficient tax authority. ④ analyst investment refers to an operation that, after in-depth research, promises principal safety and satisfactory returns. These four different types of investments are not mutually exclusive. The "analyst investment" here is, in my opinion, value investment.

It is worth noting that speculation is not equal to gambling. Here, Graham makes a strict distinction. Gambling means creating risks that do not exist in advance, such as horse racing bets; conversely, speculation involves an existing risk that must be borne by someone. Speculation is speculation, gambling is gambling, never describe gambling as speculation. If it is speculation, in Graham's case, he distinguishes it as "rational speculation" and "irrational speculation". Rational speculation means that it is reasonable to take risks after carefully weighing the pros and cons. Irrational speculation refers to taking risks without fully studying the situation.

Graham believes that in the general area of business, promising companies belong to "rational speculation" and represent "business investment". If the risk of loss is very small, individual "business speculation" is eligible to be the analyst investment we specifically refer to. And those enterprises with poor prospects must be called "irrational speculation".

Similarly, in the financial sector, the reasonable and prudent purchase of a large number of common shares can be called "rational speculation". Making a big deal without full consideration and without justification is bound to be classified as "irrational speculation". Under special circumstances, buying common shares on both qualitatively and quantitatively attractive terms minimizes the inherent risk and can be classified as analyst investment.

Intrinsic value is defined as "value justified by facts". It must be recognized that this value is by no means limited to "investment value", that is, the total value contains the components of the investment. If the speculative value is obtained by rational analysis, then most of the speculative value can be included appropriately. Therefore, only when the market price clearly reflects irrational speculation, can we say that the market price exceeds the intrinsic value.

Problems arising from human nature

Graham had seen from that time that speculation was directly related to human nature. He points out that the most unusual feature of financial markets is that they are controlled by purely psychological factors. The blind optimism of speculators led to a temporary peak in share prices. This peak lasts for years, not months, and is driven not by just one group of speculators, but by China Finance Online Co Ltd as a whole. They gamble feverishly in the name of investment.

At the same time, there are other human factors. The value of a security is not reflected in the market price automatically or in accordance with some mathematical relationship, but through the buying or selling decisions of investors. The psychological factors of investors not only have an impact on the market price, but also strongly affected by the market price. The success of a thoughtful investment action also depends in part on the subsequent market price.

If the field of sound investment shrinks, it seems that we should turn to rational speculation, based on the theory that good speculation is certainly better than bad investment. However, it must be recognized here that the psychological factors of speculators pose a strong threat to their success.

In terms of causality, investors become more optimistic as prices rise and more pessimistic as prices fall, so in essence, only a few speculators can remain invincible. And no one has reason to believe that he will always be the winner when most of his peers will fail. Therefore, "training in speculation, no matter how sophisticated and comprehensive, is a source of misfortune for individuals." "A lot of people were introduced into the market as a result, and they gained a little at first, but in the end, almost everyone failed miserably.

Graham finally warned us that if investment is unprofitable and speculation is dangerous, then smart people should focus on securities that are undervalued-bonds or stocks that are carefully analyzed and find that their market prices are lower than their intrinsic value.

There is no denying that the practice of finding low-priced securities is also error-prone, and it is difficult to implement, and the effect is not satisfactory. But under normal circumstances, this approach can produce better average results, and the most important thing is that it represents a basically robust attitude and becomes an effective means of protection in the speculative boom.

In summing up Graham's ideas, Howard Marx pointed out that investment refers to the purchase of financial assets that essentially meet the requirements of conservatism, prudence and, most importantly, security. The securities that meet the investment criteria are based on their quality characteristics, not the expected returns. They are either suitable for investment or not. Investments that comply with accepted standards are safe, while speculation requires risk-taking. In fact, any asset can be a good investment target, as long as you have a comprehensive understanding of it at the time of purchase and the purchase price is low enough; and vice versa, if the purchase price is too high, no matter how high the asset may be the worst investment.

The phenomenon on the surface and in front of it is the dream bubble and bottomless abyss of the financial world. Just reading the chapter "Securities Analysis" and "Investment and speculation" does not necessarily change the tendency of speculation. Because investors usually focus only on making money, but ignore the countless potential risks in the investment environment. However, the reason why Securities Analysis can be read often and always new can remind us again and again that in extremely bad markets to internalize Graham's investment philosophy, in markets where greed and bubbles become the norm, it is easier to form out-of-cycle wisdom. In fact, avoiding serious losses is a prerequisite for maintaining high compound interest growth.