What Kind of Investor Are You?

Benjamin Graham’s first chapter in The Intelligent Investor gives a very interesting explanation of what investing actually is and the mindset we should bring to it.

1. Investment ≠ Speculation. For Graham, the difference is not whether you buy a stock or a bond. The difference is how you make the decision. An investment should have three elements: thorough analysis, reasonable protection of principal, and an adequate — not necessarily extraordinary — expected return. If one of these is missing, a speculative element begins to appear. This is a crucial distinction: the same stock can be an investment at one price and speculation at another.
2. Speculation is not inherently “bad” — it becomes dangerous when you call it investing. Graham does not treat speculation as a moral failure. His warnings are practical: do not think you are investing when you are really speculating; do not speculate with serious amounts of money if you do not have the necessary knowledge and skill; and do not risk more than you can afford to lose. A practical implication is that speculative capital should be kept separate from investment capital.
3. Graham distinguishes between the Defensive and the Enterprising investor. These investors are not primarily separated by how much risk they like, but by how much effort they are willing and able to invest. The Defensive investor wants to avoid serious mistakes, keep things simple, and spend relatively little time on the process. The Enterprising investor is prepared to devote more time, research, and discipline to finding opportunities that may offer better-than-average results. Higher returns should not automatically come from taking more risk, but from applying more — and more intelligent — effort.

To sum it up, when investing in the stock market, the most important question is not “Which stock should I buy?” but rather:

“How much time, knowledge, and attention am I putting into this process — and are my return expectations consistent with that effort?”

If you hardly research individual companies but still expect to outperform the market by a wide margin, you may not be an Enterprising investor at all — you may simply be a speculator.

Adapted from:
Benjamin Graham — The Intelligent Investor