The Blurry Line Between Investment, Speculation, and Gambling: Bishnu Thapa

Sharesansar's disclaimer: Apart from the holding period, investment success is determined by the percentage accuracy of the strategy, risk factoring, portfolio sizing, and myriad other factors. One can't hold a stock forever, given the life expectancy of an individual investor, and it is fruitless to hold shares of a company that is not worth much. The holding period is always an edgy topic among investors. Sharesansar hopes to spark a healthy discussion of ideas and not the berating of each other's investment strategy. 

Article by Bishnu Thapa

These are the three questions that matter a lot in the investment world:

1. How much cash can I expect to receive?

2. When can I expect to receive it?

3. How confident can I be that I will get the amount of cash I expect and how certain can I be that I will get it when I expect it?

People usually make investments with a future end date in mind. The length of time from the date when investment is purchased to the final date can be called the investor’s planning horizon, investment horizon, or holding period. A financial asset purchased with a very short holding period in mind probably is not really an investment- it simply may be a gamble or speculation.

A gamble is usually a very short-term investment in a game of chance. The holding period for most gamblers can be measured in minutes (Editor's note: Day trading is not possible in the context of Nepal's capital market). That is, the result of the so-called investment is quickly resolved by the roll of the dice or the turn of a card. Such activities have planning horizons that are far too brief to do the research that should precede any investment activity.

Speculation typically lasts longer than gambles but is briefer than investment. Speculation usually involves the purchase of a salable asset in hopes of making a quick profit from an increase in the price of the asset, which is expected to occur within a few weeks or months. Those involved in speculations are reluctant to refer to this activity as speculation because they dislike the connotations of the word; they prefer to refer to speculations as investment activities.

There is no precise dividing line with respect to the length of investment holding periods that could be used to separate gambles from speculations and speculations from investments. At its best, investment is well-grounded and carefully planned speculation whereas it is an ostrich-like form of involuntary and unconscious speculation at its worst. There are no set rules or permanently establishing which securities are investments and which are speculations.

So it’s up to you who want to be and find the answer to the questions above.

Thapa is an MBA finance who currently resides in Finland.