I'd suggest that all investing is fundamentally "speculating on price".
The idea of speculating is "I don't care understanding the underlying business, the only things that matters is the price is going up".
But that does not mean there are no people actually investing. Investing means you understand at least to some degree the thing you are investing in and you think it is sound investment -- meaning there is good enough chance the money you will put in it will get multiplied over time. When actually investing you don't really care about short term price changes. When my stock falls rapidly I instantly check the news about my company to see if there exists some fundamental reason for the fall and if there is none -- I usually start thinking about whether it makes sense to buy even more of it while "stupid" speculators let it become cheap.
Getting comfortable with a level of risk, doesn't change the fact that all predictions about the future are definitionally speculative.
"Investing" vs "speculating" is a matter of degree, not kind.
Speculating, like gambling is a zero sum game (at best). Any gains come directly from other players. They are inherently risky.
There is a qualitative difference here.
"Speculating" is merely a loaded term for investment that the writer does not approve of.
There's any number of plausible reasons why one person's investment is another's speculation:
- Is technical analysis investing or speculating?
- How much do you need to know to call it an investment? Do you just need to have heard of FTX, or do you need to have gone to visit for due diligence?
- How do you know it's zero sum? A business model may appear later that makes it positive sum.
EOTD we're talking about decisions under uncertainty. That's literally all decisions.
> Traditional investments have ways of generating and returning money without selling the asset itself. For example, stocks in companies can pay dividends, real estate can return money by renting out properties. They are positive sum games and the risk of loosing money is much lower.
This part is particularly suspect.
Let's say I make a crypto exchange and sell shares in the company. Let's say it pays dividends.
Is buying my shares speculating or investing?
Look at real estate, your other example. There's a massive real estate collapse going on right now, with enough empty units to fit all of Germany in it.
Is that speculating or investing?
Dividends are actually the same as selling a piece of your investment.
The moment dividends are paid the share price falls by exactly the amount of dividend paid. One way to think is that the second before the dividends are paid everybody included the dividend in the valuation of the share price. They expect the dividend to be paid to them. One second after the dividend was paid they no longer include it in the valuation making the share price worth less to them exactly by the amount of dividend paid.
If you had a piggy bank with $100 bill in it and a cookie that is promised to you if you hold the piggy bank with the bill in it at certain time, the piggy bank is worth $100 and a cookie. But once the deadline passes you can no longer get the cookie and the piggy bank converts to being just a regular piggy bank with $100 bill and no cookie promised.
Another way to think is that the company just gave off 1% of their value to shareholders in form of cash making the company 1% poorer.
So if you had a share price of $100 and you expected $1 dividend, the second after the dividend is paid you are left with a share worth $99 and $1 in cash which is exactly what would happen if you just sold 1% of your shares.
And because nobody is surprised by the dividend, the fact of paying it has already been included in the valuation well in advance of payment. There is no reason for the valuation to change due to payment of the dividend (other than the company losing exactly the value they paid in dividend).
So, to summarise:
>> Traditional investments have ways of generating and returning money without selling the asset itself
This is false, as shown by my above explanation. Dividends are not generating anything and are actually the same as selling portion of your asset.
Buying a house and renting it out is an investment. The value of the house doesn't fall because it's generating rent.
Buying a house with the intention of reselling it a year later is speculation.
Buying a car for your taxi service is an investment because the car now generates income for you.
Buying gold, crypto, or money markets is always speculation because these things do not generate income.
Sorry but the distinction between asset values and cash flows is not material.
I've worked with derivatives for many years and they're all accounted for together, like the GP says.
Looking at it another way, what's the point in owning stock in a company that never pays dividends. There's no point a company making profit unless they give that profit out.
> Dividends are actually the same as selling a piece of your investment.
Who are you going to sell the piece to? If it's back to the company as part of a share buyback, then yes, it's the same. If it's to someone else, then no, by not paying a dividend, the company now has to spend that money on something useful that will generate a return and mean it can pay a dividend in future.
Investments generate an ROI, like the parent gave examples of (rent, dividends, the production of goods). Speculation is about arbitrage and reselling things at higher prices.
Imagine somebody in your family has a grocery store and asks you to invest in it so that they can expand the business.
Do you know them as a person? Do they have track record of being truthful? Frugal with money? Resourceful? Do they have track record of keeping their word and succeeding at projects? Is their store doing better or at least as good as competition? Do their explanations of why they are going to succeed make sense?
Do you have some knowledge about running a grocery store? If you have, this can help you a lot with filtering truth from BS. If you do not, maybe it is worthwhile to get at least a little bit of knowledge?
While you can't predict the future there is a lot of signs of what you can expect from the person or business and if the investment is significant enough you should make sure to get at least some knowledge in the area. Ideally, you would invest in things you have some kind of expertise.