Investment and Speculation

One thing that is mentioned repeatedly through the Security Analysis book (by Graham and Dodd) is the difference between "investment" and "speculation".

However, it is interesting that I didn't hear any other people talking about it right now. It may suggest that the current money managers, even they are following value investing methodology, are not considering this as an important point.

It seems to me that Graham considers "investment" as a stable and high certainty investment, but "speculation" is low certainty and volatile even if the risk-reward ratio is good, especially with diversification. Modern Portfolio theory has spent large effort on compose a portfolio to diversify the risk away, plus delicate method on risk calculation and risk control.

However, for value investing, the basic dilemma is still there. If one spends more time on gather as much information and do as much research/analysis as one can, only a small number of securities can be invested at any time. Thus the diversification is only up to a limited degree. If diversification is over a large number of securities, they will suffer from not gaining enough knowledge on the holdings.

My personal view is that "certainty" is the top priority for value investment. Therefore, the focus should be on those investments that are in a TRUE investment grade. That is not saying "speculation" is something one must avoid all the time, but it seems to be a different approach.

Also, without "certainty", it is hard to hold a stock for long time. This conviction definitely matters. That is also why Buffett says "The first principle is to never lose money". Without very high certainty, losing money will happen quite often, even if it is just 20%-30% of the trades.