Buffett’s Test for Separating Investors from Speculators

To the layman, investing and stocks seems like something of a guessing game where you’re doing nothing more than simply guessing and hoping that the companies you invest in go the right way. But, according to Warren Buffett, the Oracle of Omaha, it doesn’t (and even shouldn’t) have to be that way. After all, he didn’t come to be one of the wealthiest men in the world simply by guesswork.

The Oracle of Omaha, of course, had some thoughts on this. According to an interview with the Federal Crisis Inquiry commission (FCIC) which was released, Buffett stated that there are actually two different kinds of people in the financial world: investors and speculators.

Investors

Investors pursue low-risk investments based on fundamentals and analysis.

Buffett, of course, counts himself as an investor. Part of his philosophy of buying a stock is that you shouldn’t buy with the intention of selling. The way to making money is to invest in something that will provide long term benefits.

“When I buy a stock, I don’t care if they close the stock market tomorrow for a couple of years because I’m looking to the business — Coca-Cola, or whatever it may be — to produce returns for me in the future from the business,” Buffett said.

Speculators

Speculators pursue high-risk investments on the hope that they will close higher in order to be sold.

On the other hand, speculators are the kind of people who buy with the explicit intention of selling at a profit. It’s almost entirely a gamble, and not a good way to invest in anything.

“Speculation, I would define as much more focused on the price action of the stock…” Buffett said. “Because you are not really… looking to the asset itself.”

Which works depends entirely on what your goals are, but I think that most people (and certainly Mr. Buffett) can agree that the long term, safe solution is no only better but will likely lead to more profits.

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