“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Benjamin Graham, “The Intelligent Investor”
Benjamin Graham, widely known as the father of value investing, said that “outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook”. He acknowledged speculation is necessary and unavoidable, saying that in many common-stock situations there are substantial possibilities of both profit and loss, and the risks must be assumed by someone. But there is intelligent speculation as there is intelligent investing. He mentioned three ways in which speculation is unintelligent: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation that you can afford to lose.
Benjamin Graham went on to say that every non-professional who operates on a margin should recognize that he is ipso facto speculating. Also, everyone who buys a so-called “hot” common-stock issue , or makes a purchase in any way similar thereto, is either speculating or gambling.
His advice: If you want to try your luck at it, put aside a portion – the smaller the better – of your capital in a separate fund for the purpose. Never add money to this account just because the market has gone up and the profits are rolling in. (That is the time to think of taking money out of your speculative fund.)