Investing Versus Speculation, which is which?

I have to admit I am still learning to stay away from being one of the Speculators.

It is not an easy task, since the boundary between speculation and investing is quite blurry.

So what's speculation? Again borrowing from Seth Klarman's script, "speculators buy and sell securities based on whether they believe those securities will next rise or fall in price". And, "their judgment regarding future price movements is based, not on fundamentals, but on a prediction of the behavior of others."

Speculators are a dominated force in today's market, and they are obsessed with predicting and guessing where stock is going the next moment. I am not saying speculators are bad, as there are many investment professionals who speculates and performed very well with their predictions. However, one important thing to remember is the results are short-term orientated. The speculators might be right today, but the earning is simply a deposit for what they might lose in the future if their predictions are no long valid, it's even more true if leverage is involved.

On the other hand, Investors "believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses". But how long is long-run? No one really knows, it can be 5, 10, or 25 years. With today's world, who is going to wait that long when everyone else is seeking instant gratification?

The human behavior of greed has driven major players on the market such as hedge funds, institutional funds, mutual funds, etc to become speculators which focus on beating the next quarterly result because that will attract new assets to invest in them.

We would think Internet would bring more validity towards the Efficient Market Hypothesis because the information are clear and readily available. In fact, we are seeing quite the opposite in 2008 with substantial volatility in all asset classes. It is very difficult for people to stay rational, especially during a panic time. Also, people's interpretation and predictions will always differ, with more information comes more predictions. Finally, the consensus prediction does not make itself correct, but these are a story for another day.

To be an investor is not as simple as one would think...