Speculating on Investment, Or Investing in Speculation?

[peristaltor]

The two words "investment" and "speculation" are to some synonymous, to others diametrically opposed. I find myself in the latter camp, though the confusions and conflations these two terms suffer makes it difficult to say the least even to articulate what about the differences should be emphasized. I guess I'll first let a supposed expert

Comments

[l33tminion]

In my view, the key difference between investment and speculation is that investment increases the future production of goods and services and speculation does not. (At extremes, speculation can even act as a kind of anti-investment and diminish the production of goods and services.)

It's not a black-and-white distinction because speculation can drive investment. For example, the secondary (mostly speculative) market in stocks and bonds increases companies' ability to make money through stock and bond offerings.

I'd say the degree to which something is speculative has to do with the efficiency with which it functions as an (or drives) investment. If every dollar spent on a financial instrument means a (relatively) large increase in future production of goods and services, it's more like an investment. If it means a smaller increase in future production, it's more speculative. If it has no effect on production, it's pure speculation aka gambling.

That's still an oversimplification, especially in that it doesn't factor in what goods and services are produced.

[peristaltor]

To be honest, I kinda screwed up the post because I did not have my idea of investment in my head. The entire thing was a wrestling match between what I think a definition for "investment" might be and what most think it actually is (like yours).

For me, to "invest," one must move one's wealth into a purchase that:

• is physical in nature (aka an object); and
  
• will produce a physical dividend sufficient to recoup the initial outlay of wealth in a reasonably definable time period.

This modified definition will by necessity render stock and most bond purchases as speculative, since most are bought as places to park money in the speculative hope that the purchase will hold its value better than the money used to purchase it. (In an inflating money supply, money loses value over time, and thus must be converted into a commodity perceived as one that grows more valuable, lest one's overall cache of wealth diminish.)

And why would I (am I) constantly challenging standard definitions? Simply, I believe we are heading for a period of profound change that will affect standard definitions anyway, and that it's prudent to alter our definitions now before definitions that worked in the past prove hopelessly off the mark, bankrupting people of the cached wealth they may need for future survival.