What the heck is an investor, anyway?

What is an investor/investment?

"Investing in a solid pair of shoes is a good idea."
"I might invest in a nice gaming computer."
"Designer makeup is a worthwhile investment."

The word "investment" is used pretty often in our daily lives and in the media. But what is an investment? Benjamin Graham defines an investment in his 1934 book Security Analysis as, "a financial operation that, upon thorough analysis, promises safety of principal and a satisfactory return." So Graham broke the definition down into three parts: research, safety of principle, and a good return.

An investor seeks these three goals:

With research, you begin to understand exactly what you are getting yourself into. Research of a company, when you are considering purchasing a stock, is important. It could lead you to realize the company has tons of debt, and might be in bad financial condition.

Safety of principle means insuring that your initial investment is not lost. If you are investing $100 in stock of a company, you don't want to end up losing your $100 because the stock was too risky. Gaining very little is preferable to losing anything.

Adequate Return means that you gain money on your investment that is satisfactory to your goals. Obviously this is somewhat of a broad term, but indexes can help you understand how well you are doing. If you compare the return on your stocks after 1 year with the return of the S&P 500 index, you can get an idea of how good of a return you have achieved. For most mutual funds and individuals, just beating the S&P 500 by 1-2% is a huge achievement.

So basically, an investor is someone who makes an investment with those three ideas in mind.

The way in which these goals are achieved are extremely vast. Investments can range from stocks to gold to real estate. You could even invest in coins or collectibles which you think will rise in value over time, but that is another hobby.


The difference between Speculators and Investors

As mentioned in the previous post, called "Hey! You're Not an Investor! Get Outta Here!", speculators are not investors. To elaborate on this topic, consider what speculators hope to achieve in relation to the investor. A speculator's goal is to make money by gambling his or her money on the idea that an asset will appreciate in value. This goal is usually sought after by purchasing risky assets. By doing this, the speculator hopes to gain a much higher profit than if they would have invested in a low risk asset. The problem here is that with high potential for profit, comes high potential for loss. Additionally, the high gains that speculators can make are not usually sustainable over a long period of time. Think decades. What is the point of making a ton of money, if you just end up losing it a few years later?

Essentially, speculators seek very high returns, but without seeking safety of principle. Without seeking safety of principle, gains cannot be sustainable over long periods of time.

Stay Tuned!

My upcoming posts will discuss different types of investors, investing on a college budget, and more about the methodology of value investing. Don't worry, I'll manage to find some good recommendations for s'mores soon!