I think we agree. (per your post of 4/10 7:33am). Investments entail risks. There is no riskless activity in life — except perhaps death.

I think your citing of Ben Graham is apt — as his hedge fund was down 70% at the depths of the great depression. (Little solace to his investors, but that outperformed the market!).

But, at the end of the day, (or decades), the economy will heal; profits will grow — and another bull market will unfold. People will (again) point to the fact that stocks produce better returns than every other asset class — and when that’s again consensus, I’ll be slowly selling the stocks that I bought during the depths of despair. (And I’ll probably sell way too early too!)

Members of different professions suggest solutions based on their specialty (lawmakers – more laws and regulations, programmers – new computer models, rating agencies – new rating criteria and controls, psychiatrists – an evaluation and analysis of the mind, etc.) in many cases ignoring the fundamental responsibilities of understanding all possible consequences that come with freedom of choice.

My fear is that even at such a high price tag to all of us critical lessons are not learned by many and even if learned are likely to be ignored by another generation.

For time immortal there have been unscrupulous sellers and gullible purchasers. This is true in all facets of life — whether it’s a cult leader handing out kool-aid … or a bond salesman misrepresenting a security.

I’m sympathetic when folks are preyed upon by unscrupulous or fraudulent market operators (because that is the entire logic behind regulation.) However, I’m entirely unsympathatic when supposedly qualified market participants, take risks to achieve excess returns, and then cry “foul,” when they discover that there is a downside to risk-taking. (As they say in the fine print: “Investments CAN lose money. Past performance is no guarantee of futures results.”)

Lastly, this episode underscores an important silver lining: WE LIVE IN A FREE SOCIETY — that permits us to make choices (both good and bad). Noone forced anyone to buy a mortgage backed security. Noone forced anyone to buy a dot com stock. (And I didn’t. And most folks didn’t either.) However, now that I am more bullish on equities than I’ve been in almost 20 years — whether I am right or wrong — I have that choice.

My greatest fear is the sort of emotions which you are feeling become widespread, and lead to more nanny-statism — where the “wise men” of government make decisions for the individual. Freedom of choice is a bedrock of long term happiness and prosperity.

The practical implication is to recognize a wolf in sheep’s clothing when being sold an “investment” regardless of how “credible” the seller may be (with the most credible of them all being our government). Often even the seller does not fully recognize (hence disclose) the relevant risks. This is far from being philosophical especially for most ordinary folks and even smart institutions who recently lost significant balances following the advice of trusted “investment advisers.” Do you think folks would be as likely to follow advice if it came from a “speculation adviser?”

While it may take less than a second for select folks like yourself to measure up most of the risks of any proposition, I am deeply bothered by an article like this one. This is at the institutional level. What happens at the individual level I am afraid is even less encouraging.

Often a long-term speculation or one involving a less liquid instrument is considered an investment. Sometimes dishonesty is internal and very subtle having the effect of us sticking by a losing gamble labeled a long-term investment. In these cases, The First Law of Rocky may come to rescue but when the second occurrence takes place we’re often overwhelmed by either greed or fear.

I really appreciate your clear definition above but was hoping to bring out some of these additional points.

Is worship an investment? Is having children an investment? Is buying Inflation-Linked Bonds an investment? Is saving for college in an FDIC insured account an investment?

If you cannot illustrate an investment, then I think we are having a philosophical discussion — and not a practical one. As previously disclosed, I slept through my philosophy classes at Yale … so I cannot be any help…

Rocky

-investing means you are expecting your profits to come from an increase in the intrinsic value of the assets you are holding
-speculating means you are expecting your profits to come from price oscillations around the intrinsic value

Of course, defining and, more importantly, determining intrinsic value is a different issue.