General Connotations of the Term "Investment"
1) Putting or having money in a business. eg. A man "invests" $1000 in opening a grocery store.
Note, however, that it accepts rather than rejects the element of risk- the ordinary business investment is said to be made "at the risk of the business."
2) All securities(stocks, bonds, warrants, etc) are "investments".
No real distinction is made between investment and other types of financial operations such as speculation.
3) It is commonly thought that investment is good for everybody and at all times.
Such a distinction is generally taken for granted.
A Proposed Definition of Investment
An investment operation is one which, upon thorough analysis, promises safety of principle and a satisfactory return. Operations not meeting these requirements are speculative.
The "safety" sought in investment is not absolute or complete; the word means, rather, protection against loss under all normal or reasonably likely conditions or variations.
Eg. A safe bond is one which would suffer default only under exceptional and highly improbable circumstances. Similarly, a safe stock is one which holds every prospect of being worth the price paid except under quite unlikely contingencies. Where study and experience indicate that a chance of loss must be recognised and allowed for, we have a speculative situation.
Additional Criterion of Investment
An investment operation is one that can be justified on both qualitative and quantitative(price) grounds.
Many have the misconception that "blue chips" were safe investments. They may be good quality stocks, but the public unconsciously assume that no price would be too high for a good stock. Carried to its logical extreme, such an issue was equally "safe" after it had advanced to 50 as it had been at 2. The issue then becomes speculative without quantitative grounds or a margin of safety in price.
Types of Speculation
1) Intelligent speculation- the taking of a risk that appears justified after careful weighing of the pros and cons.
2) Unintelligent speculation- risk taking without adequate study of the situation
Margin-of-Safety concept
In the case of bond or preferred-stock investment this margin is usually represented by the excess of earning power over interest or dividend requirements, or of the value of enterprise above the senior claims against it.
In the case of a common stock it should be represented either by the excess of calculated intrinsic value over the price paid, or else by excess of expected earnings and dividends for a period of years above a normal interest return.
1) Putting or having money in a business. eg. A man "invests" $1000 in opening a grocery store.
Note, however, that it accepts rather than rejects the element of risk- the ordinary business investment is said to be made "at the risk of the business."
2) All securities(stocks, bonds, warrants, etc) are "investments".
No real distinction is made between investment and other types of financial operations such as speculation.
3) It is commonly thought that investment is good for everybody and at all times.
Such a distinction is generally taken for granted.
A Proposed Definition of Investment
An investment operation is one which, upon thorough analysis, promises safety of principle and a satisfactory return. Operations not meeting these requirements are speculative.
The "safety" sought in investment is not absolute or complete; the word means, rather, protection against loss under all normal or reasonably likely conditions or variations.
Eg. A safe bond is one which would suffer default only under exceptional and highly improbable circumstances. Similarly, a safe stock is one which holds every prospect of being worth the price paid except under quite unlikely contingencies. Where study and experience indicate that a chance of loss must be recognised and allowed for, we have a speculative situation.
Additional Criterion of Investment
An investment operation is one that can be justified on both qualitative and quantitative(price) grounds.
Many have the misconception that "blue chips" were safe investments. They may be good quality stocks, but the public unconsciously assume that no price would be too high for a good stock. Carried to its logical extreme, such an issue was equally "safe" after it had advanced to 50 as it had been at 2. The issue then becomes speculative without quantitative grounds or a margin of safety in price.
Types of Speculation
1) Intelligent speculation- the taking of a risk that appears justified after careful weighing of the pros and cons.
2) Unintelligent speculation- risk taking without adequate study of the situation
Margin-of-Safety concept
In the case of bond or preferred-stock investment this margin is usually represented by the excess of earning power over interest or dividend requirements, or of the value of enterprise above the senior claims against it.
In the case of a common stock it should be represented either by the excess of calculated intrinsic value over the price paid, or else by excess of expected earnings and dividends for a period of years above a normal interest return.
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