In his master piece called “The Intelligent Investor” Benjamin Graham points out the difference between speculation and investing. Many times we engage in speculation and wrongly think that we are investing.
Graham defines an investment operation as one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. The key idea is that investment decisions should be based on accurate analysis, and they should not lose one’s capital and should provide a reasonable return for the risk undertaken.
Benjamin goes on to mention that outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities of both profit and loss, and the risks therein must be assumed by someone. Benjamin says that there is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.
So before committing funds to any venture consider whether you are in fact speculating or investing.
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