The Money Guru: The difference between investment and speculation, brilliantly explained by Warren Buffett

As technological development brings a dizzying array of investment options to our screens and fingertips, it is becoming more important than ever for the average person to learn the fundamentals of capital investment.

One of the main distinctions everyone should know before parting with their money is the difference between investment and speculation.

Waren Buffett, chairman and CEO of Berkshire Hathaway, one of the largest conglomerates in the world, had this to say on the subject:

“All investment is, is laying out some money now, to get more money back in the future.

“Now, there’s two ways at looking at the getting the money back. One is from what the asset itself will produce. That’s investment. One is from what somebody else will pay you for it later on irrespective of what the asset produces. And I call that speculation.

“So if you are looking at the asset itself, you don’t care about the quote [the price the stock is going for], because the asset is going to produce the money for you. And that is what society as a whole is going to get from investing in that asset.

“Then there’s the other way of looking at it, what somebody will pay you tomorrow for it, even if it’s valueless. And that’s speculation. And of course society gets nothing back from that eventually, but of course one group profits at the expense of another.

“We don’t care whether something’s quoted because we don’t buy it with the idea of selling it to somebody. We look at what the business itself will produce. We bought See’s Candy in 1972. The success of that has been because of the cash it’s produced subsequently. It’s not based on the fact that I call up somebody at a brokerage house every day and ask, 'What’s my See’s Candy stock worth?' And that is our approach to anything.

“You just look at every asset class, every business, every farm, REIT [Real Estate Investment Trust], whatever, and you ask, 'What is this likely to produce over time?' And that’s what it’s worth. It may sell at vastly different prices from time to time. But that just means one person is profiting against another, and that’s not our game.”

The above raises a number of questions to modern readers, perhaps most obviously in relation to cryptocurrency, which by the above definition can only be termed speculation.

That might explain why Mr Buffett is famously so reticient to put any money in the sector. He is known to prefer investing in things he understands - which, judging by Berkshire Hathaway's portfolio, includes everything from real estate to insurance, food and beverage to airlines, railways, clothes and banks.

His advice to every prospective investor in any asset, then, is: "Will this thing make me money in and of itself, or am I hoping to pass it on to the next sucker willing to pay me more for it?"

The Money Guru is a BusinessNow.mt column presenting insights from some of the top business and investment minds from around the world. Are you looking for advice on a particular subject, or found useful tips you would like to share with a wider audience? Drop us a line on our Facebook Page.