"Investment" versus "Speculation": How are they different, and why does it matter?
Keith Weiner and Seth Levine face off in a thoughtful discussion. Is there a clear distinction between "investment" and "speculation"?
On July 29, I took a break from talking about money creation to moderate a discussion between two thoughtful professionals. The topic was “investment” versus “speculation.”
Keith Weiner, CEO of Monetary Metals & Co., draws a sharp distinction between investing and speculating.
On the other hand, Seth Levine, professional bond trader and author of The Integrating Investor, maintains all investments necessarily contain a speculative element.
Who is right? Take a listen, then decide for yourself!
Good discussion. The topic of speculation vs. investment seems contentious, and it wouldn't be contentious if we had a better definition of speculation. In the 1960s, the book University Economics by Armen A. Alchian and William R. Allen was recommended at NBI, and I bought it there. The book starts with this sentence,
"A test of any theory of science is its ability to explain the events of the real world in a coherent, consistent fashion. Economics passes that test."
This book presents economics as a "non-normative" science. That shows the facts of economic exchange from the point of view of action and effect. The authors were scrupulous not to judge the validity or morality of economic activity. They presented only the actions and effects of free markets and controlled markets. One of the great values of this book was that the authors isolated the condition that gave rise to the action and defined the economic activity in essentials.
I think you could have done better on the difference between investing and speculation. Seth Levine seemed to have the most accurate idea of the value of speculation. The financial purpose of speculation is to profit by taking risks out of the market that "value" producers and investors don't want to take.
The investor intends to make money on the increase of wealth in the productive process of the business. Since risk is inherent in ownership, the speculator bets that the effect of market price change will be greater or less than the net present value based on the production value.
The importance of the speculator is easier to understand in the case of commodities. Wheat is expensive before harvest and cheaper after. The flour mills want a stable price of wheat because they want a stable price of bread. They want to buy wheat at a stable low price.