Interviewer:I’d be interested in, you know, what you think speculation is as opposed to investing which you’ve written about and also what you think excess speculation or excess risk is in that context.
Warren Buffett:It’s a tricky definition, you know, it’s like pornography (laughs) the famous quote and all that, but I look at it in terms of the intent of the person engaging in the transaction. And an investment operation, and that’s not the way Graham defines it in his book, but an investment operation in my view is one where you look to the asset itself to determine your decision to lay out some money now to get some more money back later on. So you look to the apartment house, you look to the stock, you look to the farm in terms of what that will produce. And you don’t really care whether there’s a quote under it all. You are basically committing some funds now to get more funds later on through the operation of the asset.
Speculation, I would define, as much more focused on the price action of the stock, particularly that you buy or the indexed future or something of the sort. Because you are not really, you are counting on, for whatever factors, could be quarterly earnings, could 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. 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 whether 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 whether the stock market is open tomorrow then I say to some extent I’m speculating because I’m thinking about whether the price is going to up tomorrow or not. I don’t know where the price is going to go.
And then gambling I would define as engaging in a transaction which doesn’t need to be part of the system. I mean, if I want to bet on a football game, you know, the football game’s operation is not dependent on whether I bet or not. Now, if I want to bet on October wheat or something of the sort people have to raise wheat and when they plant it they don’t know what the price is going be later on. So you need activity on the other side of that and who may be speculating on it but it is not an artificial transaction that has no necessity for existing in an economic framework. And the gambling propensity with people is huge. I mean, you took a, you know, some terrible sand out in the west about 100 years ago and you created, you know, huge industry with people flying thousands of miles to do things which are mathematically unintelligent, you know. Now that is, shows something in mankind that has a strong, strong behavioral, has a strong behavioral aspect to it and think how much easier it is, you know, to sit there in front of a computer and have the same amount of fun without, you know, getting on a plane and going a 1,000 miles and having to make reservations and do all that sort of thing. So with this propensity to gamble encouraged incidentally by the state with lotteries, you know, with terrible odds attached to them, people don’t have to be trained to want to gamble in this country but they, they have this instinct, a great many people. They’re encouraged when they see some successes around, that’s why the bells and whistles go off in the casino when somebody hits a jackpot, you know. So, you know, you have all these things pushing to that including governmental urging to buy lottery tickets and all that sort of thing. And now you’ve got a vehicle like, you know, S&P futures or something where you can go in and out and where Congress has granted particularly favorable tax treatment to you if you win. I mean, you can be in for ten seconds and have 60% long term gain which I regard as, you know, extraordinary. But it exists.
That’s all I know about gambling, actually speculation (laughs) but I do know it when I see it.