Investment vs. Speculation

Investment vs. Speculation

10/16/2022

Occasionally, people say: What if we wait until the market hits rock bottom, then invest? And when the markets peak, we sell and repeat... we'll make a fortune! It sounds simple, doesn't it...


However, how do you know when the stock market is at its bottom or at its peak? 

\You won't.** —> You'd just be speculating, and that's not investing. 

People often confuse investment with speculation...

\Financial markets either rise or fall every day. In simplified terms, it's 50/50. This means that if we speculate in the short term, we have about a 50% chance of success. 

However, when we look at the functioning of stock markets over longer periods, the situation is significantly different. 

Considering a yearly interval, the stock markets have been profitable in 71% of cases, in five-year intervals, growth is seen in 86% of cases, and in fifteen-year periods, there hasn't been a period of loss at all (see graph below). 

Investing and speculation have something in common, but they are not the same. 

→ The goal of both is to make money, but what distinguishes them is the method they employ to achieve it! 

Differences between Investment and Speculation 

 INVESTMENT: 

→ For an investor, a market decline is an opportunity to buy, not a reason to panic. They buy what fits their strategy, especially at a discount. An investor doesn't sell their portfolio even if its value hits an all-time high. They know the portfolio generates or will generate passive income, so they'll continue to hold it. 

SPECULATION:

Not everyone can succeed through speculation. It requires a high tolerance for the complete loss of funds. If you aim to build wealth steadily, it's better to avoid speculation. 

→ Speculation is playing with money. If you want to play, you have to be prepared to lose. 

Also, remember that within 3 years, you're subject to tax obligations... 

What's the goal? 

An investor's goal is returns due to value change, while a speculator aims for profit due to price change. Investment is a long-term affair, unlike speculation. 

Let's take two examples: 

  1. An investor buys fruit trees. They wait until the tree grows and begins bearing fruit, then they profit by selling it. A speculator also buys fruit trees. However, they don't wait for the first fruits and sell the tree when its price rises. 
  2. Imagine your friend has 300,000 CZK and invests it with the aim of having 600,000 CZK within a year to buy a new car. Your other friend also has 300,000 CZK, but their goal is to protect the money from inflation and will be happy if they "earn" something extra. 

Which of your friends has a better chance of achieving their goal? 

—> The first will have to take risks, choose highly aggressive instruments with significant value fluctuations because they need to make 100% profit in a year. 

The second can follow a path of long-term investment, creating a portfolio combined from various investment instruments. They don't need to fear market fluctuations excessively and can sleep peacefully. 

Which do you prefer more, speculation, or investment? And do you have the nerves for speculation?

Interested in investing?

Do not hesitate to contact us

Contact

Ing. Petra Štěpánková, MBA, EFA

+420 604 218 602

petra@meliorinvest.cz

Would you like us to contact you by phone or email?

Write to us what information you are interested in, fill in your contact details and we will get back to you right away.

or
This page is protected by Google reCaptcha. For more information visit Privacy Policy and terms and conditions Google services.