What Is Speculation?

To speculate is to theorize about something that is uncertain. We can

speculate about anything that is uncertain, but we use the word

"speculation" in this book with particular reference to the buying and

selling of stocks and bonds for the purpose of making a profit. When

people buy stocks and bonds for the income they get from them and the

amount of that income is fixed, they are said to invest and not to

speculate. n nearly all investments there is also an element of

speculation, because the market price of investments is subject to

change. "Investment" also conveys the idea of holding for some time

whatever you have purchased, while speculation conveys the idea of

selling for a quick profit rather than holding for income.



To the minds of most people, the word "speculation" conveys the thought

of risk, and many people think it means great risk. The dictionary gives

for one of the meanings of speculation, "a risky investment for large

profit," but speculation need not necessarily be risky at all. The

author of this book once used the expression, "stock speculating with

safety," and he was severely criticized by a certain financial magazine.

Evidently the editor of that magazine thought that "speculating" and

"safety" were contradictory terms, but the expression is perfectly

correct. Stock speculating with safety is possible.



Of course, we all know that the word "safety" is seldom used in an

absolute sense. We frequently read such expressions as: "The elevators

in modern office buildings are run with safety." "It is possible to

cross the ocean with safety." "You can travel from New York to San

Francisco in a railroad train with safety." And yet accidents do occur

and people do lose their lives in elevators, steamships, and railroad

trains. Because serious accidents are comparatively rare, we use the

word "safety."



In like manner it is possible to purchase stocks sometimes when it is

almost certain that the purchaser will make a profit, and that is "stock

speculating with safety." When Liberty Bonds were selling in the 80's,

many people bought them for speculation. They were not taking any risk,

except the slight risk that the market price might go still lower before

it would go higher, and that did not involve any risk for those who knew

they could hold them. The fact that the market prices of Liberty Bonds

would advance was based upon an economic law that never fails. That law

is that when interest rates go up, the market prices of bonds go down,

and when interest rates go down, the market prices of bonds go up. When

Liberty Bonds were selling in the 80's, interest rates were so very

high, it was certain that they would come down. That the market prices

of Liberty Bonds would go up was also certain, but nobody could tell how

much they would go up in a given time. It was that element of

uncertainty that made them speculative, and not that there was any doubt

about the fact that the market prices of them would go up. Buying

Liberty Bonds at that time was speculating with safety. If you read this

book with understanding, you will know much about speculating with

safety.