Wednesday, March 6, 2013

Investing and Speculating

From here.

Seth Klarman has written:

“The line I draw in the sand is that if an asset has cash flow or the likelihood of cash flow in the 
near term and is not purely dependent on what a future buyer might pay, then it’s an 

investment.  If an asset’s value is totally dependent on the amount a future buyer might pay, 

then its purchase is speculation.”

Based on this, a lot of investors are actually speculators - they may do a fundamental analysis and 

say that a 20 PE company will move to a 25 PE size and then I will sell.

And the kicker via Buffett:

"Nothing sedates rationality like large doses of effortless money."

But Buffett's take on speculation is better:

“So there’s two types of assets to buy. One is where the asset itself delivers a return to you, such

as, you know, rental properties, stocks, a farm. And then there’s assets that you buy where you

hope somebody else pays you more later on, but the asset itself doesn’t produce anything. And

those are two different games. I regard the second game as speculation.”
“Basically, it’s subjective, but in investment attitude you look at the asset itself to produce the

return. So if I buy a farm and I expect it to produce $80 an acre for me in terms of its revenue

from corn, soybeans etc. and it cost me $600. I’m looking at the return from the farm itself. I’m

not looking at the price of the farm every day or every week or every year. On the other hand if

I buy a stock and I hope it goes up next week, to me that’s pure speculation.”
For me, it's more like: If I can put it in a statement..

The value of Tata Steel is x and it's available at a price of y, x is much greater than y, hence I will invest (subject to a zillion minus 1 conditions)

The price of gold is x and its value is unknowable - but I will buy because its price is going to go up because of a global currency debasement race - that's speculation

The value of Nestle India is x and it's available at a price of y, x is lesser than y but I believe that y will increase, hence I will buy! - that's speculation

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