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If you don’t know the difference right off the bat, comparing an investor to a speculator is virtually the same thing as comparing the intellect of Stephen Hawking to that of Britney Spears’ or money-making prowess of Bill Gates to that of Kevin Federline’s.

‘Nuff said.

If you require more information to understand the difference between an investor and a speculator, you may want to keep reading. But, before I go on and explain the difference between these two personality types which make up the world we live in, it would help to understand where these terms came from in the first place:

A brief history of everything

The Great Depression

You may remember this brief period of time, with a quarter of the United States being unemployed and the U.S. Gross Domestic Product (a measure of a country’s overall economic performance) dropping by a devastating 46%. The Dow Jones Industrial Average plummeted from a high of nearly 380 in 1929 all the way down to 40 points in 1932 (a nearly 90% decline in value)!

Stockholders lost their life savings, millions of Americans were left jobless and penniless, most families depending on charity for food.

Suffice to say: it wasn’t pretty.

The Aftereffects

Even years after the disaster, young and old claimed the stock market to be a derivative of the devil, possessed by demon spirits that made your money vanish into the deep, dark abyss known only as the “stock market”.

People made sure not to pass the stock exchange on their way home, claiming it to be bad luck for their financial situation. Others would sacrifice their family members as a bounty to the money gods in order to spare their meek wallets.

Meet the Speculators

Okay, so the last two paragraphs were somewhat fictional, but none-the-less: all these people are imbeciles (or, as the mighty Benjamin Graham would put it, “speculators”).

Yes, even the poor families that were left starving and homeless, relying on charity to survive, even being forced to sell their bodies just to be able to feed themselves – they were all imbeciles.

Before you lunge a javelin laced with TNT at my pectorals for making such a seemingly absurd statement, hear me out. Why do I call these people imbeciles? Because all of the signs of an imminent crash existed, yet people were too busy jumping on their platinum-encrusted trampolines as a result of the “Roaring 20’s” to care enough.

Then, when the inevitable crash came, these people were left scratching their heads and wishing they had prepared themselves for such an event instead of spending all their money on moonshine, howitzers and Ford Model T’s.

Let’s take a look at the events that lead up to the big crash (known as “Black Tuesday”):

• The optimism of the “Roaring Twenties” led hundreds of thousands of Americans to raise as much money as possible via selling their kidneys and taking out huge loans at the bank in order to put all their money into the stock market in hopes of making huge profits (a.k.a. speculation)
• Over $8.5 billion was loaned out – which was more than the entire currency circulating in the U.S. at the time
• As stock prices rose faster than a Bugatti in a parking lot, more and more people were encouraged to invest more and more of their money in hopes of making even more
• The DOW increased fivefold in value over a period of six years to a high of 381.17

Now if that’s not the definition of a bubble then I don’t know what is – and as we all know, the bigger a bubble gets, the bigger the pop will be.

So, if you were an investor during this time and looking at all the events that were transpiring, wouldn’t you realize that at one point in time there will be no place to go but down?

It may seem obvious to you now, but it certainly didn’t to those people. Hence: imbeciles.

What these people were doing was speculating. They were assuming that since stock prices were rising they would continue rising, and thus, they sold off members of their family to the slave trade so they could raise as much money as humanly possible to invest and make a nice profit. And they did all this with virtually no foresight as the big fat moneybags that they were imagining in front of them were blocking off the view of the massive cliff that awaited shortly down the road.

In the end, these people/imbeciles/speculators were doing exactly the opposite of what they should have been doing – they were buying when they should have been selling.

Introducing the Investors

On the other hand, as the moronic speculators were partying late into the night with their crystal champagne glasses and their buckets full of gold bullion, the mighty investors were watching them like hawks – complete with night vision goggles and telemetric scopes, just waiting for their chance to swoop in and gobble up their prey.

Why were they not partaking in the drunken parties of the speculators? Because they did their homework and didn’t let emotions cloud their judgment by using cold hard logic. Sure, these “investors” may sound like today’s equivalent of those nerds that live in their mothers’ basements and spend their days raiding the Night Elves’ lairs in World of Warcraft– but at least they would be so rich that their basements would be the size of Olympic swimming pools and their computers built by NASA.

The media outlets and history books will have you believe that the Great Depression was the work of the devil’s henchmen, but in reality it was actually one of the most opportunistic moments in history to make more money than Bill Gates could ever dream of having (and this, for once, isn’t a comical exaggeration of any kind).

You can’t blame them though, bad news will always sell more than good news and our history books get their information from old newspaper clippings – perhaps that’s why so many people suffer from the horrible disease of imbecility.

As I mentioned earlier, the value of the DOW tumbled by almost 90% down to a low of nearly 40 points, sounds pretty horrible, right? Well, not if you’re an investor. Had you been an investor, this seemingly horrible disaster is just the right time for you to swoop out of your perch and viciously claw at everything you could get your hideous little talons on.

And what was the result? Well, the DOW’s value today is 10,500 and rising versus 40 points almost a century ago. That’s a 26,150% rate of return. If you had invested $1,000 in 1932 and just let it sit there without even touching it, you would have $260,150 today – this is without reinvesting your money or even doing any stock-picking of any kind.

Not bad, right?

So, who would you rather be: an investor or a speculator? Let’s take a closer look at the two to see what distinguishes one from the other, in case you didn’t catch on from my little history lesson.

Defining the “Speculator”

The way we refer to “speculators” in the world of investing today is largely thanks to the mighty Benjamin Graham – teacher and mentor of Warren Buffett’s and author of  the revolutionary investing book, “The Intelligent Investor”.

Graham’s definition of a speculator is very similar to my definition of an imbecile, so whenever you see me using the word “imbecile” just refer back to the magical teachings of Graham’s.

A speculator is someone who does not utilize his knowledge, skills and understanding to comprehend his investments. He has little to no understanding of the investment and is simply buying it because of the rising prices and general optimism that people are blabbering about all around him – it is for this reason the speculator exposes himself to an unprecedentedly high margin of risk. Sound familiar? It should.

In short: A speculator is a moron.

Every time you hear stories on the news about people losing all their money and now living out of the back of their station wagons, chances are they were speculators. All the prosperous investors of the 1920s who became homeless in the 1930’s? Speculators. All the prosperous investors of the late 1990’s who traded in their Ferraris for station wagons in the early 2000’s? Speculators.

Not only does a speculator not consider reviewing annual reports or financial data and statistics, he strongly believes in luck. Speculators act upon emotions, prejudice, future predictions and any other uncertain sources of information that forecast (a.k.a. guess) a higher price of an investment – similar to those paranoid people with tin foil hats attached to their heads who are convinced that the government is controlling people via chips attached to their spines.

Defining the “Investor”

Again, this is another term developed by Graham as we know it today.

An investor is a person that utilizes all of his/her capabilities and potential in order to allocate, study, understand, research and buy a certain investment in order to make big fat moneybags. An investor uses all the tools given to him to make sure that what he is investing in is actually worthy of investing into and is something that has potential for growth. Virtually everything is certain with an investor, there is no guessing involved.

An investor’s emotions are controlled via a tight kung fu grip and instead of reacting to the jumps and dives in the market with machine gun bursts, he sticks to a preconceived strategy and sound principles of investing.

Not only do these precautions and measures eliminate almost all potential risk that comes with an investment, but an investor also has the ability to project future growth with confidence by knowing his investments better than Chuck Norris knows his roundhouse kick.

A true investor tends to be rich enough to afford a forty-two room mansion complete with platinum door knobs on every door.

And since an investor is rich, he can afford expensive cars – and as we all know, chicks dig cool cars.

To invest or to speculate?

Chances are you are a speculator (a.k.a. imbecile, if you prefer Mr. Moneybag-ian terms) – but that doesn’t mean all hope is lost!

In reality, everyone starts out as a speculator and the more they learn and progress the more investor-ish they become.  There was only one entity in history that was able to skip the initial stage of imbecile and jump straight to the mega-investor stage and that was me (with the returns of The BAG Fund to prove it).

Chances are you won’t get so lucky so you will have to rely on good ol’ hard work and studying to get to that point. The good thing is that it’s not nearly as hard to get to the level of an Investor as you may think – in fact, it is no harder than peeling an avocado in the back of a moving truck (hard for some, easy for most).

So, how do you become a true Investor?

Here is a revised chart that I initially made in an earlier article explaining the difference between a Moron Investor and a Rich Investor which will hopefully help you people understand:

The Speculator a.k.a. Imbecile	The Investor
Research consists of overhearing two homeless people on the subway discussing a hot new stock while fighting over a piece of steak	Researches his/her investments by reading annual reports, studying financial statements, analyzing competitors and following market news.
Buys high, sells low	Buys low, sells high
Buys hot and popular stocks that everyone else is buying despite the company’s fundamentals or intrinsic value	Buys forgotten or unpopular stocks that everyone is selling knowing that people are irrationally [over-]selling them
Has no clear plan of what to do with his investment	Knows when he is going to sell the investment before buying it
Panics and prepares to sell her organs to black market dealers when the markets go down a few points and jumps for joy and starts buying everything in sight when they are going up.	Doesn’t care about short-term fluctuations because the real and safe profits are made by investing with a long-term perspective
Invests emotionally (a.k.a. irrationally)	Takes advantage of the mishaps of irrational/emotional investors
Over-diversifies her holdings to ridiculous extents	Knows that diversification leads to diluting the effects of your greatest winners [For those that say diversification is a vital hedge against risk: risk comes from not knowing what you are doing and lack of research]
Loses money	Makes money
Should re-read this article seventeen more times	Shares this post with everyone he/she knows

Here are some handy articles which should accelerate your treacherous transition from imbecile to mighty Investor:

• How to Read an Income Statement
• Welcome to the Stock Market! (free eBook)
• Constructing Your Own Stock Portfolio
• Choosing an Online Brokerage
• How to look for great stocks
• The Ten Percent Rule
• Sign up for a free e-mail trading course

So, I have officially given you the tools necessary in order to go out and invest better than Warren Buffett. Question is, are you going to take advantage of these tools?

Your wallet will find out in due time.

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