Warren Buffett has a simple test for separating investors from speculators

Warren BuffettAP ImagesWarren Buffett, speculating on a future in football.

There are investors.

And then there are speculators.

The former pursue lower-risk investments based on fundamentals and analysis, while the latter pursue high-risk investments that are sometimes borderline gambling.

So, by those definitions, many “investors” aren’t actually investors.

Notably, in an interview with the FCIC, Warren Buffett outlined what he believed to be the “real test” of whether someone fell into the former category or the later.

The interview comes from a document dump from the National Archives, which released transcripts, meeting agendas, and confidentiality agreements from the FCIC. The group was set up in the aftermath of the crisis by Congress to look into the causes of the event.

As Buffett explained:

“And I say, the real test of how you — what you’re doing is whether you care whether the markets are open.

When I buy a stock, I don’t care if they close the stock market tomorrow for a couple of years because I’m looking to the business — Coca Cola, or whatever it may be, to produce returns for me in the future from the business.

Now, if I care if whether the stock market is soap tomorrow, then to some extent I’m speculating because I’m thinking about whether the price is going to go up tomorrow or not. I don’t know whether the price is going to go up.”

The FCIC also asked Buffett how he would define the “speculation.” As expected, Buffett had an interesting answer there, too.

“It’s a tricky definition. You know, it’s like pornography, and that famous quote on that,” he told the FCIC.

(Supreme Court Justice Potter Stewart famously wrote that, regarding whether something was pornography or not, that, “I know it when I see it.”)

“Speculation, I would define as much more focused on the price action of the stock, particularly that you, or the index future, or something of the sort,” Buffett continued.

“Because you are not really — you are counting on — for whatever factors, because you think quarterly earnings are going to be up or it’s going to split, or whatever it may be, or increase the dividend — but you are not looking to the asset itself.”

In short, Buffett basically argues that what separates and investor from a speculator is the intent of the person engaging in the transaction.

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