Speculation is often denigrated as a close relative of gambling. Investing, meanwhile, is praised as an extension of saving. These characterizations have merit, but they are not the exact truth.
In reality, a speculator buys an instrument with a view to a specific event that will act as a catalyst. An investor, though, buys an instrument because he or she sincerely believes that its qualities make it the best use of his or her money over time.
A speculator and an investor thus have different goals and different ways of trying to achieve them.
Both the investor and the speculator must be ready to sell a holding as soon as it disappoints. The speculator (ideally) will sell as soon as the catalyst has taken effect, whether or not it has had the desired result of an increase in the value of an asset.
An investor might sell whenever the intrinsic qualities of the investment (taking into account market conditions) no longer fit it for a portfolio. These are generalizations of course. Here are some examples to try to show what I mean:
Speculating in Canada
One can speculate on what the Olympics might do for Canada. If it seems that they will be good for Canada’s stock market, one could buy EWC, a bet on the rise of a basket of blue-chip Canadian stocks.
If it looks like the Olympics will mark a peak in Canada’s markets, then the speculator might short EWC, that is, borrow the shares and sell them. In either case, there is a clear catalyst, and a time at which the trade should end, though the trader would still keep an eye on it until then.
A speculator would take into account that Canada is a resource-heavy economy, and that its economy might be more dependent on gold and other ores than on the Olympics.
Investing in Canada
To invest in Canada, someone might choose a stable, growing company, in an industry likely to thrive, whose management one admires. He or she would be careful not to pay too much, and would still watch the money, even though it is invested for the long term.
An investor might screen for stocks with the characteristics he or she believes will lead to endurance, stability, and reasonable growth. Or an investor might choose a solid, unleveraged Canada fund, that’s been in business for a while. These are only examples. An investor needs to do research, and must decide whether it’s possible to gather enough information to invest in Canada.
Putting money in Energy
To speculate in oil one might consider the effect of the opening of the Dubai Gold & Commodity Exchange. Did this event mark a top, at least a temporary one, as everyone crowded into the trade? Will oil fall now? There’s an ETF, symbol DUG, that bets against the price of oil. Or, does it seem that increased trading outside US control would give speculators a clear field and lead to even higher bids? USO is one instrument that can be used to bet on higher oil. TAN, a solar play, is another.
To invest in oil, there is a whole spectrum of choices. Huge integrated oils like XOM, refiners like TSO (the refiners have lagged, possibly for good reason), various oil service companies and an oil service ETF called OIH. Pipelines. Small companies that explore for oil. Or, there are alternative energy choices, ranging from hare-brained to “what a good idea.”
Canadian Energy Trusts can yield 12% as I write this, and that is actual money, not potential gain. Taxes can be a problem. A careful investor might decide the whole area is overheated, and not increase the energy portion of his or her portfolio right now.
The U.S. Dollar
To speculate on dollar movement there are ETFs called UUP and UDN. Other ETFs allow one to be long or short the Euro, making an indirect bet on dollar movement. Many foreign currency ETFs exist. FXC is the ETF that holds the Canadian dollar.
To invest with a view to a falling dollar, one might try something like IBM or ORCL, companies that could benefit from dollar translation, if their prospects seem otherwise worthwhile. Or search for a solid company or fund making money in foreign lands. Again, these are only examples.
The difference between gambling and speculation is that if you gamble, you will certainly lose. Assuming you don’t cheat, and the casino doesn’t cheat (why would they bother?), the set percentages in any casino game will inevitably grind the gambler down.
Speculators, though, are playing a game of bridge or poker, against skilled and wily opponents. There is an element of chance, but it is not really gambling. With application, attention, a thick discretionary bankroll, and patience, it is possible for a speculator to grind out some gain. Investing, of course, is easier on the nerves, even though it is not always a sure thing.