Everyone “INVESTING” in stocks is NOT an INVESTOR

Confused? Okay, let me rephrase it. Everyone BUYING and SELLING stocks is not an investor.

Then what are these non-investors called? Benjamin Graham, known as the “Dean of Wall Street” and teacher of legends like Warren E. Buffet and Sir John M. Templeton, called them SPECULATORS (or TRADER as we generally call them).

Didn’t understand? Let me explain.

Investing vs Speculation (Trading / Sattebaazi)

Benjamin Graham defined investing as follows – “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

In simpler words, an investment should satisfy 3 criteria:

1. A thorough/diligent analysis is done
2. The safety of the principal is guaranteed (reasonable assurance)
3. An adequate return is promised (reasonable assurance)

Trading, on the other hand, includes everything else, i.e., buying and selling based on news, price charts (technical analysis), based on recommendations of friends and family, and so on. You get my point, right?

No? Let me explain this with the help of examples from some of my past transactions:

Examples

ITC: Investment

I bought ITC’s shares in 2020 after carefully analysing its business and concluding that the shares were selling at a good discount. The balance sheet was rock-solid, the income statement was highly profitable and growing over the years and the cash flows were very high. Plus the company was paying out regular and high dividends. All this and the prices hadn’t increased in 5 years.

So, there was a thorough analysis, the safety of the principal was guaranteed by extremely low valuations and rock-solid financials and adequate return was promised by high and regular dividends backed by profits and cash flows.

This was a proper investment and has more than doubled my money as of the date of this post (increased from approx ₹200 to ₹444) along with hefty dividends over this period.

Click here to see today’s price of ITC.

Oil India: Speculation/Trading

I saw Oil India’s share when the price was around ₹180 in 2018 and I bought it, mainly based on the price being very low. I ended up selling it in a few months for a small loss at a price of ₹150.

This was speculation. There was some price chart analysis but it was mostly based on intuition without any safety of principal and adequate return.

Click here to see today’s price of Oil India.

Why do you need to know the difference?

That is a very good question. The answer is – to KNOW WHEN TO SELL.

Why we bought a share in the first place helps us understand when we should sell it.

I bought ITC with the intent of investing for the long run so I didn’t sell it even when the returns were flat (or slightly negative) for a long time. I bought Oil India for a few quick bucks and so I sold it for a few quick bucks (of losses).

Many people don’t know the difference between trading and investing and get into trouble when they try to apply investing wisdom to their gambling. Both have DIFFERENT RULES. But that’s a separate discussion for some other day.

You can be both at the same time

See, I was both an investor and a speculator at the same time but in different stocks.

If the line got blurred then I could’ve panicked with my ITC shares at a very low price or held on to Oil India shares for a bigger loss. Keeping the distinction clear gave me clarity about which one to hold and which one to sell.

Here’s legendary trader and investor Rakesh Jhunjhunwala’s take on this:

Closing thoughts

Thanks for reading, I hope you found this useful. If you think your friends will find it useful as well then do share it with them.

There’s a really good post on the differences between investing and trading on Investopedia that you could check out.

All the best for your investing/trading and see you later! Bye!

PS: This was my first ever blog. I still have a long way to go as a blogger but I want this to stay here like my first YouTube video. This serves as a reminder to me and my readers about how far I’ve progressed.

Disclaimer: The information presented in this post is for educational purposes and should not be construed as investment advice. All the views expressed in this post are personal and are not intended to hurt any country, organisation, person, religion, caste, gender or ethnicity. We do not guarantee the accuracy of any facts stated in the post and your reliance on this post is your sole responsibility. All third-party content used falls under fair use. This post is NOT sponsored. Some product links are affiliate links which means if you buy something I’ll receive a small commission.