Investors and Speculators. Which One Are You?
In his book The Intelligent Investor, Benjamin Graham divides bond and stock market participants into three categories:
Passive investors
Enterprising investors
Speculators
The first kind of investor is someone who creates a moderate risk, diversified portfolio with different asset classes, and is dedicated to putting money into that portfolio and just leaving it alone. Their expectation is that the markets will provide a fair return on their capital with minimal effort. One example might be an investor who aims to have 25% of their portfolio in cash and bonds, and 75% of their portfolio in stocks. They will re-balance their portfolio once a year to maintain this ratio and will try to maintain exposure to the whole market.
The second type of investor is the enterprising investor. This is the investor who understands certain types of business and can analyze said business to determine their intrinsic value and determine whether or not they can be purchased at a discount. This investor spends a significant amount of time and effort analyzing data and interpreting that data better than most of the investing population. The enterprising investor can expect to receive a return that is higher than the passive investor because they can interpret or have access to information that provide them with an advantage. They too, can only expect a fair return on their capital.
Lastly, there is the speculator. The speculator is someone who believes that they can time short term movements in the stock market or particular securities. Someone who believes they can make more than a fair return on their capital through betting and speculation. The speculator does not possess a competitive advantage in either access to information or the ability to interpret information related to the assets they invest in.
Graham asserts that if you cannot have a reasonable expectation of becoming an enterprising investor, which takes significant skill and time, you should aim to be a passive investor. His thesis is that you will do quite well as a passive investor if you understand your limitations and some basic rules of the game, such as low turnover, asset allocation, and diversification. He warns that speculation is a losing game and it is often played under the guise of investing.
Graham's first book was published in 1949 and has been proven time and time again, albeit with some significant changes to bond and stock markets since then. Several worthy successors have contributed to subsequent editions of the book and it's a foundational read for anyone who wants to take control of their investing.
So, where do you fall? Don't lie...
