Chapter 2. Too Much Speculation, Not Enough Investment

Investing is all about the long-term ownership of businesses. Business focuses on the gradual accumulation of intrinsic value, derived from the ability of our publicly owned corporations to produce the goods and services that our consumers and savers demand, to compete effectively, to thrive on entrepreneurship, and to capitalize on change. Business adds value to our society, and to the wealth of our investors.

Over more than a century, the rising value of our corporate wealth—the cumulative accretion of dividend yields and earnings growth—resembles a gently upward-sloping line with, at least during the past 75 years, precious few significant aberrations.

Speculation is precisely the opposite. It is all about the short-term trading, not long-term holding, of financial instruments—pieces of paper, not businesses—largely focused on the belief that their prices, as distinct from their intrinsic values, will rise; indeed, an expectation that the prices of the stocks that are selected will rise more than other stocks, as the expectations of other investors rise to match one's own. A line representing the path of stock prices over the same period is significantly more jagged and spasmodic than the line showing investment returns.

The sharp distinction between investment and speculation, however much it may have been forgotten today, is age-old. The best modern definition was set forth in 1936 by the great British economist John Maynard ...

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