BENEFITS AND EVILS OF SPECULATION 1. Investment, speculation and gambling.—It is the purpose of this chapter to clear up as far as a most difficult subject permits, the controversy as to whether speculation is a good or bad institution and whether, if possible, it should be abolished. But be fore we go more deeply into the subject it is necessary to clear the ground by making plain the essential fea tures of three well known ways of employing money —investment, speculation and gambling. These words have been used repeatedly in this book, and no doubt the reader already had his own idea of their meaning before taking up the Text. He, perhaps, gathered still further ideas about these terms from the many references made to them in these pages. But the time has now come to define and distinguish them in detail.
The three words are frequently confounded and even considered as synonymous. Indeed the three acts themselves are constantly being confused. Spec ulation is a certain aspect, it is true, of the broad term investment. It is often said that no stock is a good investment unless it is also a good speculation, mean ing thereby that an investment should have a future as well as a past. In a hearing before the United States Committee on Banking and Currency the late Charles A. Conant, a distinguished economist, was asked, "How much of a twilight zone is there between investment and speculation?" He replied: A very wide one necessarily. Some securities that were considered at one time absolutely non-speculative, like a dis tinguished New England railroad, sometimes become very speculative. There is nothing sure. As the gentlemen . . . said, you cannot give a policy of insurance with investments. You have to take your chances in the evolution of the finan cial and economic affairs of the world.
Another witness at the same hearing testified: Many who buy for investment buy partly on credit ; and purchase for investment may have in it a speculative ele ment determining the permanence of the investment. It is a common experience to buy for investment and yet sell on an unexpected rise in the market or when an expected rise takes place. It is not a criterion of the investment or speculative character of a transaction whether or not the security is bought partly on credit any more than it is in the case of purchases of real estate. Securities bought with a specula
tive purpose may be retained as investments. Any state ment of the proportion of the transactions that are of an investment as distinguished from a speculative character is merely a worthless guess.
And yet investment and speculation differ widely not only in the words themselves but in the under lying principles involved. Let us first define specula tion and then we can see how it differs from invest ment.
2. Speculation defined.—The word speculation is derived from the Latin "speculare" meaning to spy out, to look out, to observe. This Latin derivation affords the best idea concerning the meaning and real significance of speculation. It involves noth ing more or less than the desire of the individual to overcome the domination of chance and to penetrate into the future with a view of profiting thereby.
The speculator in his daily operations is obsessed with the idea which remains, permanent and all dominant in his mind—how can he anticipate or spy out the future conditions of supply and de mand, especially the former? He strives in this way to overcome the inevitable fluctuations of values and is successful in so far as he accomplishes this end.
Speculation is never artificially created. It exists only when property has fluctuating value. Fluctua tions cause speculation. It must not be supposed that speculation alone deals in uncertainties. All busi ness is fundamentally affected by demand and supply and these two forces constantly fluctuate. Especially in agriculture, upon which all other industries rest, the supply fluctuates. Among the other disturbing factors are fire, incompetency, miscalculation, corrup tion, depreciation, change of popular taste, new in ventions, and wars. Insurance may provide against some uncertainties, but only a few. Thus the profes sional speculator who has an equipment for his work equal to that of the highly trained business or profes sional man in reality assumes no greater risks than the farmer, manufacturer or storekeeper. In fact he quite properly assumes smaller risks in any given operation, i. e., he is satisfied with relatively smaller gains and losses, because the very nature of his busi ness is to assume risks, and as in the analogous busi ness of insurance, risks can safely be assumed only by making each one small.