Benjamin Graham - Investement vs. Speculation

Old-time investment, with its emphasis on book value and the past record, was shortsighted and naive, but it posessed the supreme virtue of moderation. Present-day "investment". as practiced by investment trust and everyone else, is not much more than an undisciplined wagering upon the future and as such logically indistinguishable from speculation.

Common stocks have one important characteristics (...) investment value (...) tend to increase irregularly but persistently over the decades, as their net worth builds up through reinvestment of undistributed earnings (...) no clear-cut plus or minus response to inflation.

(...) comon-stock (...) regarded as highly speculative or risky at a time when they were selling on a most attractive basis (...)

It is undoubtedly true that the old-time investor laid too much stress upon book values and too little upon what the property can earn. It was a salutary step to ignore the figures at which the plant were carried on the books, unless they showed a commensurate earning power. But like most sound ideas in Wall Street, this one was carried too far. It resulted in excessive emphasis being laid on the reported earnings - which might be only be temoratory or even deceptive - and in a complete eclipse of what had always been regarded as a vital factor in security values, namely the company's working capital position.


Source: Common Sense Investing: The Papers of Benjamin Graham