Speculating Versus Investing. Know the Difference.

Over your lifetime, you will meet many people who will claim to be investors. What is important, however, is to know what an investor truly is. This can always be left to discussion and argument, but in my opinion, a true investor is someone who realizes the value of an asset and pays that value based on the current conditions or information that you know to be true. 

In every bubble that occurs, "investors" are not the ones who are causing the bubbles and the bursts that always follow. Look at the tech bubble of the late 1990s and the real estate bubble of the 2000s. When valuations get out of whack and the "average joe" is getting involved to try to make money based on the greater fool theory, this is what I call speculation in the investment world. Yes, a lot of money can be made during the uprise of the speculative times, but the downside is big and bad. When you lack the fundamentals of investing when doing a deal, when things turn south, how will you survive? For example, in real estate, where will the cash flow and the value be when values plummet and you need to refinance because your termed mortgage is coming due? In the stock market, when a dot-com is started purely based on a business idea and no revenues or assets to back it, when the market crashes, where is the value that can be sold to someone or at least operated as a functioning company in order to wait out the crash? 

Now, there is some "speculation" that can be done by investors. For example, I know the apartment business very well. If I find a building that is 100% vacant and in major disrepair, I am acting in speculation by purchasing, rehabbing, and renting out the building, but I am doing it based on a lot of past experience and knowledge of the business. I am not assuming an over-the-top value once the building is done. 

Trust me, this is a very tough concept for anyone to understand and even I go back and forth on the difference, but at the end of the day, buying based on the hope of things being good all the time is a sure way to disaster at some point. Eventually the world will catch up and you will be left holding the hot potato. I'd much rather invest in a deal that makes sense financially today and if the market determines it is worth even more down the road, that's even better.