A client was generous enough to track down a library that still has a copy of Seth Klarman’s “Margin of Safety “available to read in the library. Yes I own many, many books but I am not willing to spend $1,200 on this one, when I can read it for free.
Klarman starts the first chapter by distinguishing between investing and speculating. Using the famous Mark Twain quote to illustrate the two times in life when one shouldn’t speculate: “when you can’t afford it, and when you can!”
Speculators are described as buying in the hope or assumptions that others will want to buy the same asset (be it a painting, a baseball card, or a stock) later and for more money. Basically the “Greater Fool” theory.
Investors are described as buying the cash flow the investment returns to its owner. (As such, a painting can never be an investment by this definition!). Basically stocks, bonds or real estate.
Klarmam goes on to describe examples that provide descriptions of various speculative bubbles, discussing the faulty logic that first propelled the speculators to bid up prices followed by the inevitable bursting which destroys the wealth of many.
Do you invest or speculate? I find I have done both.