Investors and Speculators

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SpeculatingAndInvesting

I have a love affair with history and the financial markets. From what I’ve learned so far is that, it is easy to become rich in the Stock Market; but it’s nearly impossible to become rich quickly. I learned this when I first understood the difference between an investor and a speculator.

Many people believe that Wall Street doesn’t add value to the economy. To a certain extent; they’re right. What I think they really mean to say is that, ‘speculating doesn’t add value, but investing does’. Some time ago, in an interview, Warren Buffett stated that if you “dance in and out of the market you will lose”, then he went on to add that you should take a look at the historical prices of the Financial Markets.

If we look at the Dow Jones Industrial Average (DJIA), you will notice that in 1940’s it was less than 200 points, and today it’s over 15,000 points. The S&P 500 in the 1950s was less than 20 points and today, it is over 1,700 points. Now ask yourself, “how did people lose money?”

DJIA HistoricalThis answer comes from surprisingly asking another question: What is the difference between a Speculator and an Investor?

There are thousands of definitions of “speculators” and “investors” but the best way I know how to distinguish one from the other, is to understand what kind of investing strategy a person uses. There are only two kinds of investing strategies. The first is passive investing and the other is active investing.

A passive investor is the individual who uses a buy-and-hold strategy and purchases a stock with the intention of long-term appreciation. This investor believes that the long term market trends will be profitable.

To the contrary, the active investor is the individual who attempts to profit from short-term price fluctuations (hence Buffet’s “dancing in-and-out” analogy). These individuals don’t bother themselves with the long term trends as long as they create high short-term returns. If a trader is an active investor; than this individual is a speculator and the reverse is true.

If you’re interested on learning more about passive investing, read about Index Funds on”Retiring Financially Free

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