Investment and speculation are two concepts widely used in the world of the stock. Often used interchangeably, although they have very different connotations from the perspective of value investing .

In this article we look at the difference between investment and speculation according to Benjamin Graham , analyze the characteristics required for a financial transaction not qualifying considered speculative and end the separation between the two.

Definition of investment and speculation by Benjamin Graham

Benjamin Graham defines investment in his book "The Intelligent Investor" as follows:

"An investment operation is one which, upon thorough analysis, promises security to principal and an adequate return"

Speculation is defined by Graham opposed to investment:

"Operations not meeting these requirements are speculative"

The 3 requirements of a non-speculative investment by Graham

Comprehensive analysis of the company

For Graham, a comprehensive analysis is:

"The study of the facts in light of the established safety criteria"

Therefore, an inversion to be made without prior analysis is speculative. The greater the depth of analysis, less investment is speculative.

Security of our investment

According Benjamin Graham, this implies:

"Protection against losses under conditions or normal variations or reasonable"

As we see, this is a rather vague concept or subjective, so this will depend on what we consider normal. Warren Buffett is much more forceful with the requirement of investment security with its historic phrase:

"Rule No.1 is never lose money. Rule # 2 is never forget rule # 1 "

Adequate performance

Graham considered adequate or satisfactory performance:

"Any type or quantity of performance, small it may be, that the investor is willing to accept as long as it acts with reasonable intelligence"

Again this is a subjective concept, because it depends on the investor's return objectives.

Is it possible to invest without speculating?

For Graham, any financial transaction that does not meet the requirements enumerated above are considered speculative. However, I consider it necessary to clarify the difference between investment and speculation of Benjamin Graham.

First, we must start from the fact that all investments are subject to some uncertainty, however small. As there is always the possibility of losing our investment, we can say that any investment involves speculation in varying degrees. There may be speculation without investment, but not without some speculation investment.

Although there is the economic concept of "risk-free rate" (rate of return without risk), this no longer an abstract concept nonexistent in practice. For many American bonds or German bonds are practical representations of this concept. However, it is possible (although unlikely) that these countries can not pay if it happens some totally unforeseen event, such as a war or a natural disaster.

What we try to do is minimize speculation to maximize the safety of our investments and, therefore, minimize the risk. We have three methods reduce speculation and, therefore, increase the security of our investments:

We invest in companies easily assessed, typically those with more predictable revenues.
Deeper analysis of companies.
Better analyze our investments, increasing our knowledge and experience.

The combination of these three methods, along with a large dose of common sense and experience, is what has made Warren Buffett the third richest man in the world and the best investor in history. Ye may not be investing in the list of world's richest by Forbes magazine, but with a little effort will succeed a good return for your savings sleeping well at night.

Historically, the process of building investment portfolios has focused on two asset classes: stocks and bonds, although in recent years investors have become increasingly interested in finding non-traditional assets with potential to increase performance, smooth volatility, or both if possible.
Thus the interest in raw materials, in particular, has increased as investors have found exposure to natural resource prices a "third asset class" with which optimize traditional portfolios of stocks and bonds .
The great returns generated by the asset class historically may serve as further evidence of the enormous potential of raw materials . However, the raw materials are complex assets and options that investors have access to this asset class are often complicated and difficult to understand. On the other hand there is a universe of possibilities in raw materials, with dozens of families and specific assets, many of which risk profiles / return drastically different.
Commodities are risky assets , but the understanding of the components of the prices and details of investment vehicles that offer exposure to these resources can lead investors to this asset class used efficiently and as a vehicle investment.
The classification as a commodity focuses on the concept of fungibility, which means that the products are treated as equivalent or exchangeable for end users and financial investors alike. In essence, the fungibility requires standardized identical physical properties, being similar consumables regardless of where they occur or where they are. Gold is perhaps the best example: a bar of gold in London is the same as a bar stocked in New York and Singapore. Light, sweet crude oil is light sweet crude oil, regardless of whether they reside in a tanker in the middle of the Atlantic or a pipeline in Louisiana.
The possibility of exchange is a fundamental concept in commodity markets and standardizing the market and enables investors worldwide market large volumes of goods daily.
The possibility of exchange with respect to raw materials simplifies the valuation of these assets significantly, prices of commodities are derived from the supply and demand only. Of course, predict and understand the factors of supply and demand is not easy, but the pricing equation in the raw materials is extremely simple.
Market segmentation Product: forking raw materials in soft commodities and hard commodities. Soft commodities grown in plants or trees as extracted from the soil hard. Soft Commodities are many agricultural resources such as corn, wheat, sugar, cattle and soybeans. Hard Products include industrial and precious metals such as gold, copper, nickel, silver, platinum, and zinc. Also falls under the classification "hard" petroleum products such as oil and natural gas Brent or WTI.
A more detailed commodity is to segment the market into product families that generally have similar physical properties and uses. The six major product families include:

Precious Metals: Gold, silver, platinum and palladium all fall under this category.
Industrial Metals: This category includes metals that are generally less expensive than precious metals and more used in sectors such as construction and industry
Agricultural products: This category includes natural resources that are frequently used for human consumption, including corn, wheat and soybeans.
Livestock: This category includes animals, livestock generally much beef as pork.
Energy: Raw materials related to energy production are among the most actively traded, this category includes crude oil in its two variables Brent and WTI, natural gas, and other mixtures and derivatives such as gasoline, diesel and furnace oil .
Perishable: In this category, sometimes grouped with other agricultural products include coffee, cotton, sugar, cocoa and orange juice.

Why invest in commodities?

Commodities are assets that have unique and cash flows associated with the underlying asset: a gold bar will never generate cash or make a dividend payment, and a wheat field never made a coupon payment or repayment on investment.
The appeal of raw materials is the ability of the asset class of smoothing overall portfolio volatility and protecting against certain adverse economic environments with low probability but high impact event in returns. inversely Adding assets correlated to a portfolio has the effect of smoothing the overall volatility, since it is unlikely that these components move in the same direction simultaneously. Thus mainstream appeal of the products lies in the correlation or lack thereof to traditional asset classes like stocks and bonds with the consequent potential to reduce overall risk.
Of course at the expense of reduced volatility of returns is not the desire of an investor, although there is evidence to suggest that the raw materials have historically delivered appreciation while overall lower volatility. in other words, the raw materials can provide the best of both worlds when it comes to asset allocation strategies.
The inflation coverage is a major concern for all investors, especially those living on fixed incomes, as the rise in prices erodes the purchasing power of existing wealth yields and eats all kinds of assets. On this side another attractive aspect of the raw materials is the ability of the asset class to act as a hedge against inflation due to the appreciation in value when inflation kicks in, which offset losses elsewhere (dividends, coupons, interest, rents) of the portfolio as a result of a general price increase. Inflation is an increase in prices, and as such, usually include an increase in raw material prices that are inputs into goods and manufacturing processes. In other words, inflation probably will not happen unless the prices of raw materials, including oil, metals and agricultural products become more expensive.
On the other side the raw materials can also function as a commitment to the maintenance of world economic growth, and in particular the expansion of emerging economies. Developing economies to supply rapidly urbanizing migration of rural populations to the cities, so it motivates the demand for raw materials to build infrastructure, to feed growing populations, and serve the consumer goods manufacturing. For those who believe that these demographic trends are favorable to increased demand for natural resources, investment in raw materials could be an optimal way to gain exposure to this investment thesis.

How to invest in commodities?

There are four main options for investors seeking exposure to commodities, each of which has advantages and potential disadvantages:

Physical exposure: The most basic way of achieving exposure simply involves purchasing and storage of the goods desired. This method ensures the investor exposure to changes in the spot price of raw materials. Unfortunately, physical exposure only makes sense for products that exhibit certain physical standards and involves the maintenance of a sufficient value to weight ratio to keep storage costs to a reasonable level. The storage of gold coins in a safe is one thing, but trying to get physical exposure to crude oil or livestock presents a number of logistical and cost barriers that hinder investment opportunities.
Futures Contracts: Developed in the futures markets allow investors to gain exposure to commodity prices through financial contracts with natural resources as underlying assets. While this method simplifies the investment process, it also introduces additional risk factors as the return of such assets derived not only depends on changes in spot prices, but also the slope of the futures curve and the current level of interest rates, and leverage suppose what some investors may feel uncomfortable or even limited by regulation. Futures are contracts created as a hedging tool for producers and traders of raw materials, but speculators have used as an investment vehicle at the same time.
Shares: shares in companies engaged in the production or extraction of raw materials. Because the profitability of these companies usually depends on the market price of their products, their perspectives tend to improve with increasing prices of raw materials in question and vice versa.
ETCs: Investment Vehicles listed on a stock exchange and traded like stocks that allow investors to gain exposure to commodities individually, sectoral or global. These exchange-traded commodities for benefiting from all the qualities I have outlined above, taking into account certain risks common to futures contracts, as such ETCs replicate indices whose constituents are commodity futures in question.

Below I discuss some tables with cumulative returns for different periods of time, the correlations with key benchmark stock indexes, volatility and Sharpe ratio for each of the reference materials used as ETF Securities ETCs.