Value Investing vs. Business Investing

by Joe Ponzio

In his 1934 book Security Analysis, Benjamin Graham laid out the definition for investing versus speculating. In the 74 years since he and David Dodd penned the book, nothing in the definition has changed. That said, BPal asked a very interesting question. I answered it in the comments, but I figured I should post about it as well.

Ben Graham’s Definition

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.

Let’s pick it apart.
An Investment Operation

As investors, we hope that everything we touch turns into gold. When a single investment turns sour, many people run back to the drawing board ā€” buying books and scouring the internet for a new way to look at things.

Buffett said,

You’re right because your facts are right and your reasoning is right ā€” that’s the only thing that makes you right.

When speaking of “investment” versus “speculation”, Ben Graham was talking about an investment operation ā€” the entire portfolio strategy, regardless of any particular investment therein. And look closely at Buffett’s quote. He doesn’t say, “You’re right because the price will go up and you’ll make money on every investment.” Instead, Buffett admits that some investments will go bad.

Good poker players know that it is crucial to make the right decision, regardless of how the cards fall or what the outcome would have been.

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