‘This investment operation is one which, upon thorough analysis promises safety of principle and an adequate return. Operations not meeting these requirements are speculative’… There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose. In our conservative view, every nonprofessional who operates on margin should recognize that he is ipso facto speculating… The defensive investor must confine himself to shares of important companies with a long record of profitable operations and in strong financial condition…invest only if you would be comfortable owning a stock even if you had no way of knowing it’s daily share price.

Boy there is a lot to unpack here. I could get into the details in the chapter: how the thirty “tyrants” of the DIJA gained only 36% between 1960 and 1970 while the S&P rose 58%; the foolish four investment strategy losing 14% compared to the average market loss of only 4.7% in the mid 90’s; that bonds would’ve been a better investment than common stocks in 1964 despite the inflation, but I don’t think any of this was the point of chapter 1.

I think the point of chapter 1 was to humble the reader by providing counter-intuitive examples, kind of implying the question, ‘could you really have predicted all this?’ It introduced the ideas of due-diligence, diversification and patience. It set expectations on returns. Most importantly, it drew the line between speculating and investing.

I knew a man since my childhood, a family friend, who lost more than $100,000 day-trading on margin to-boot shares of gold and silver mining companies, causing him to lose his home. To this day he doesn’t understand where and why he was wrong. He had no idea what the net revenue, expenses, profit, long-term strategies or day-to-day operations of any these companies were. I suspect it was a game to him, timing his buys as the line drooped down and his sells when it went up. When I was a child in high school, he came over and we were discussing his business when I asked him why he day-traded and told him that I heard diversification was important. ‘Gold is non-volatile. It will never lose it’s value!’ He proudly proclaimed. Years later when I questioned him, he said that it wasn’t his fault. ‘There was some skulduggery in the company that was revealed and wiped me out. Other than that, I was making money.’ His wife chimed in, ‘some days he made $800, some days $500, another day $1200.’ They never understood. He was an unintelligent speculator. He thought he was an investor when he was a speculator; he speculated despite not having any financial background or tools and he risked more money speculating than he could afford to lose.

Remember that behind every ticket symbol is a company with real operations and real profits. Speculating on a company’s future growth is fine, but don’t risk more money than you can afford to lose.