🔒 Difference between trading and investing – With insights from The Wall Street Journal

Whenever you buy any financial asset because you have a hunch or just for kicks, or because somebody famous is hyping the heck out of it or everybody else seems to be buying it too, you aren’t investing.

You’re definitely a trader: someone who has just bought an asset. And you may be a speculator: someone who thinks other people will pay more for it than you did.

Of course, some folks who buy meme stocks like GameStop Corp. GME -6.29% are investors. They read the companies’ financial statements, study the health of the underlying businesses and learn who else is betting on or against the shares. Likewise, many buyers of digital coins have put in the time and effort to understand how cryptocurrency works and how it could reshape finance.

An investor relies on internal sources of return: earnings, income, growth in the value of assets. A speculator counts on external sources of return: primarily whether somebody else will pay more, regardless of fundamental value.

The word investor comes from the Latin “investire,” to dress in or clothe oneself, surround or envelop. You would never wear clothes without knowing what color they are or what material they’re made of. Likewise, you can’t invest in an asset you know nothing about.

Nevertheless, the Journal and its editors have long called almost everybody who buys just about anything an “investor.” On July 12, 1962, the Journal published a letter to the editor from Benjamin Graham, author of the classic books “Security Analysis” and “The Intelligent Investor.” That June, complained Graham, the Journal had run an article headlined “Many Small Investors Bet on Further Drops, Sell Odd Lots Short.”

He wrote: “By what definition of ‘investment’ can one give the name ‘investors’ to small people who make bets on the stock market by selling odd lots short?” (To short an odd lot is to borrow and sell fewer than 100 shares in a wager that a stock will fall—an expensive and risky bet, then and now.)

“If these people are investors,” asked Graham, “how should one define ‘speculation’ and ‘speculators’? Isn’t it possible that the current failure to distinguish between investment and speculation may do grave harm not only to individuals but to the whole financial community—as it did in the late 1920s?”

Graham wasn’t a snob who thought that the markets should be the exclusive playground of the rich. He wrote “The Intelligent Investor” with the express purpose of helping less-wealthy people participate wisely in the stock market.

In that book, after which this column is named, Graham said, “Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook.”

However, he warned, it creates three dangers: “(1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.”

Most investors speculate a bit every once in a while. Like a lottery ticket or an occasional visit to the racetrack or casino, a little is harmless fun. A lot isn’t.

If you think you’re investing when you’re speculating, you’ll attribute even momentary success to skill even though luck is the likeliest explanation. That can lead you to take reckless risks.

Take speculating too seriously, and it turns into an obsession and an addiction. You become incapable of accepting your losses or focusing on the future more than a few minutes ahead. Next thing you know, you’re throwing even more money onto the bonfire.

I think calling traders and speculators “investors” shoves many newcomers farther down the slippery slope toward risks they shouldn’t take and losses they can’t afford. I fervently hope the Journal and its editors will finally stop using “investor” as the default term for anyone who makes a trade.

“ ‘Investor’ has a long history in the English language as a catch-all term denoting people who commit capital with the expectation of a return, no matter how long or short, no matter how many or how few investing columns they read,” WSJ Financial Editor Charles Forelle said in response to my complaints. “Back at least to the mid-19th century, ‘invest’ has even been used to describe a wager on horses—an activity surely no less divorced from fundamental analysis than a purchase of dogecoin.”

I hear you, Boss, but I still think you’re wrong. There’s no way the Journal would say a recreational gambler is “investing” at the racetrack just because a dictionary says we can.

Calling novice speculators “investors” is one of the most powerful ways marketers fuel excessive trading.

In a recent Instagram post, a former porn star who goes by the name Lana Rhoades posed in—well, mostly in—a bikini, as she held up what appears to be Graham’s “The Intelligent Investor.” According to IMDb.com, she starred in such videos as “Tushy” and “Make Me Meow.”

In her post, which was “liked” by nearly 1.8 million people, Ms. Rhoades announced that she will be promoting a cryptocurrency called PAWGcoin.

The currency’s website says the coin is meant for “those who pay homage to developed posteriors.” (PAWG, I’ve been reliably informed, stands for Phat Ass White Girl.)

PAWGcoin is up roughly 900% since Ms. Rhoades began promoting it in early June, according to Poocoin.app, a website that tracks such digital currencies.

Ms. Rhoades, who has tweeted “I also read the WSJ every morning,” couldn’t be reached for comment. PAWGcoin’s website encourages visitors to “invest now.”

In Ms. Rhoades’s Instagram post, she is holding up an open copy of the “The Intelligent Investor,” whose cover is reversed. She appears to be reading it with her eyes closed.

Appeared in the June 12, 2021, print edition as ‘Boss, We Need to Talk About Investing.’