Are You Investing the Right Way? The Difference Between Investing and Speculating.
Bitcoin market is getting more attention than ever. It is because of the new emerging coins that promise millions in profit in a very short span of time. These coins claim to be the currency of the future. With hundreds of people who have made millions of dollars from cryptocurrency, we cannot ignore those other hundreds of thousands who lost their money. With the recent surge and celebrities diving in, more people are "investing" than ever.
With this hype, people are "investing" their life savings to cryptocurrency and majority of them are losing it because they do not spend even a few minutes doing analysis. Are they investing or speculating? And why are we discussing that on a multifamily real estate blog? Well there are many reasons.
Speculating vs investing
Study shows that the people who invested in crypto failed due to the reason that they were confusing actual investing with speculating. The most successful investors nowadays, make use of a theory known as “value investing”. This theory was introduced in their book “Security Analysis” by Benjamin Graham and David Dodd in 1934. This theory applies on every type of asset despite having a primary focus on stocks. The authors clearly state the difference between investors and speculators and define an investment operation as an operation in which the investor makes a thorough analysis and gets his/her principal amount as well as enough profit. The speculation on the other hand was defined as the operations which do not meet such requirements.
In simple terms:
If the investor has done a complete assessment and he/she is quite sure that their principal amount is going to be safe plus they have a fair chance to get a profit; that is categorized as investing.
On the other hand, if someone is “investing” in an asset without a thorough assessment of the safety of the principal even with a chance of getting a profit, it comes under the category of speculating.
We can safely say that speculating is fine as long as the person knows that he/she is speculating. We know that there are a lot of people who made millions of dollars by investing in small startups e.g. Apple, Airbnb, Microsoft, and SpaceX. Still, there are more speculators losing their investment (money, time, energy, and health). Real estate is one of the fields that gives the opportunity of investment rather than speculating. There are many pros of real estate investing, some of which are enlisted below:
Real estate does give a protection of principal if thought out sensibly.
Real estate provides an ongoing profit in some cases.
Real estate increases in value with time in most of the locations.
Investors are able to get good ROIs in sponsored real estate projects.
While real estate gives the chance to invest if you do it wisely, still there are uncertainties involved that make one speculate although with some chance of profit. In real estate speculation is quite possible in one of the following ways:
1. Selection of market
If you do not select the market with proper thinking, you can be speculating. It can be possible to get your principal amount back in such speculations but it is highly unlikely to make a profit out of such deals. I have many friends who made poor choices during market selection. They did not go well for any one of them.
2. Selection of Asset
Selecting an asset to invest in can be tricky. If you get to select the wrong one, you can be overspending on maintenance or improving of a property e.g. if you didn’t see some of the faults in property and later when you are actually carrying out the renovation, you face some unforeseen expenditures. In such a case, you might not be able to make the profit you hope for while investing. If not thought about properly, you can be stuck with an asset with problems related to the structure or resale value.
You can fall for a property that many people might not find that comfortable or worth spending so much on and hence you don’t get the resale value you expected. These are all categorized as speculations. Speculative mistakes may lead you to lose some serious profit; it can even cause you to struggle to secure your principal in some cases.
3. Timing of “investing”
Another thing that can involve speculation is timing. One can easily speculate wrong timing to buy a certain property in an area or buy an asset at a higher rate. One example can be buying a property that doubled in value in previous years and predicting that it will continue the rise. That can be the highest the property will be for at least some years. So buying on the rise can be profitable but one wrong prediction can cause you to be stuck with a high-value asset with no buyers.
4. Speculative development
We can safely say that real estate developers are wealthy. These people are sometimes super-successful in what they do, but many times they fail and lose quite a lot financially. It is a known fact that real estate does involve some luck and lots of hard work. If you are going on the edge while speculating, you are really calling for a great loss. One needs to calculate all the risk factors while “investing” in the real estate business. It`s not that bad to speculate in any business especially in real estate, but you don’t get any guarantees.
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