What You Need to Know Before Starting An Investment

What You Need to Know Before Starting An Investment

Over the past few months, much of my time has been spent reading two books: “The Intelligent Investor” by Benjamin Graham and “The Unofficial Guide to Real Estate Investing” by Martin Stone and Spencer Strauss. The first is perhaps the foundation of value investing itself, having influenced thousands, and if not hundreds of thousands, of investors since it was first published in 1949, the most notable being Warren Buffett. The second, an introductory book for the everyday man to the world of real estate. Now, although these two books could not be more opposite of one another (“The Intelligent Investor” focusing on complex investment techniques in terms of stocks and bonds and “The Unofficial Guide to Real Estate Investing” focusing on basic strategies in regards to successfully entering the housing market), they do have one thing in common, and that is each of their first chapters:

●     The Intelligent Investor: Chapter 1 - Investment versus Speculation

●     The Unofficial Guide to Real Estate Investing: Chapter 1 - Basic Investment Concepts: Investing vs. Speculating

So, is it a coincidence that each book, written 50 years apart, begins with an explanation and analysis of the same topic? I don’t think so, and as such, today we are going to address the first and most important step to becoming a successful investor: the development of your investment mindset. The comprehension of the difference between the negative mindset of speculation, the positive mindset of investing, and how your results will differ depending on which mindset you approach your investments with.

So let’s begin. Firstly, what do we mean by speculation? Simply put, to speculate is “to enter into a transaction or venture in which the profits are conjectural or subject to chance; to buy or sell with the hope of profiting through fluctuations in price” (Stone and Strauss, 1999). And to invest? It is the “[commitment] of money or capital in business to earn a financial return. The outlay of money for income or profit” (Stone and Strauss, 1999). At first glance, these two definitions may appear similar; both involve a commitment of money or capital and a financial return. However, two important words provide a clear example of the difference: to speculate is to hope, to invest is to earn.

It is in this context that speculating is negative and investing is positive. When we hope for financial profits, we are essentially allowing external factors to be in control of our money. Whether it is someone or something, we do not have control over our profits, or more often than not, our losses. Speculation is what we do when we bet on the Leafs game on Saturday night or put $100 on black at the roulette table. It is an action that is taken that will most likely lose you money. In your free time, there is nothing wrong with speculating, it can be fun and exhilarating, but when it comes to investing, one should never hope to make a profit.

However, when we invest, we earn our financial profits, and a very different story can be told. No longer is someone or something in control of our money. We have taken our own action, and have committed the time, effort, and resources required to be confident in our investment decision. The variable of hope has been eliminated. We have done our research, analyzed the market, and are convinced that the investment will be profitable. This is the mindset in which you should aim to be in when committing your money to an investment. Confidence is positive, uncertainty is not.

So, the next time you begin your analysis of a potential investment, remember this post. Ask yourself, “am I truly confident in this investment or am I just telling myself I am in hopes of it becoming profitable?” With that said, make sure you are honest with yourself. Have you spent the time, energy, and resources required for your commitment of money to be an investment, or is it simply a speculation? By keeping this in mind, you have taken the first step to becoming a successful investor. 

I am currently enrolled in my third year of study at the University of Ottawa's Telfer School of Management. I am pursuing an Honours Bachelor of Commerce with a Specialization in Finance.