Graham and Dodd’s Definition of Speculation
In their 1934 classic text, Security Analysis, Benjamin Graham and David Dodd provided a general definition of speculation: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
By this definition, most people who buy stocks are speculators. We can attempt to sharpen Graham and Dodd’s definition by including time-scale. Speculators are not interested in putting their money into a stock or commodity for a long time. They want to see a good profit quickly – on a time scale of minutes to months. If their money does not quickly perform well in a situation, they move it into another situation.
In pursuit of greater gain, speculators take greater risks with their capital than people who put their money into Savings & CD Accounts.
Jesse Livermore’s Definition of Speculation
Jesse Livermore, the 20th century’s most (in)famous speculator provided his own definition of speculation – preceding Graham and Dodd’s by several years. In Reminiscences of a Stock Operator, under his pseudonym of Lawrence Livingston, he said: “The speculator is not an investor. His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in.”
Benjamin Graham and Jesse Livermore both had more to say about speculation: Benjamin Graham continued – this time in The Intelligent Investor:
Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities of both profit and loss and the risks therein must be assumed by someone.
There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are:
- speculating when you think you are investing
- speculating seriously when you lack proper knowledge and skill for it
- risking more money in speculation than you can afford to lose
- The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.
- Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on.