Speculation, and those who practice it – the speculators – have always suffered a rather dubious reputation. The negative connotation of speculation has been further reinforced by the recent financial crisis that was triggered, in the opinion of many people, by the “evil speculators”.
But all those who so vigorously condemn speculators and their activities ignore that we are all speculating, consciously or unconsciously, and that we do it every day.
Indeed, whenever we make a decision in uncertainty, counting on such and such an event to achieve our goals, without knowing whether this event will actually occur, we are speculating. Our daily life is stuffed with such decisions. Some are trivial, others of great importance:
our decision to take this route to get to our work rather than another one in the hope of losing less time in traffic jams;
our choice of a particular field of study that we hope will allow us to find an interesting and well-paid job;
the decision to get married, because we hope (and the more we are in love, the more we are convinced) to have found the perfect partner for the rest of our life;
Of course, we can try to gather as much useful information as possible in order to make an informed decision, but as long as there is no absolute guarantee that what we expect actually occurs, every decision contains a more or less important element of speculation.
Speculation is a bet on the future. Or, to put it in the words of the American financier Bernard M. Baruch (1870-1965): A speculator is a man who observes the future and acts before it occurs.
Speculation always involves some risk taking.
In finance, speculating consists in acquiring or selling a specific quantity of a commodity
- in the hope that the price of this commodity will evolve in a direction that allows us to make a profit, either by selling the commodity later at a higher price or by buying it back at a lower price,
- while accepting the risk of losing money if the price of this commodity does not evolve as we expected.
Many goods and products lend themselves to speculation: equities, first of all, but also bonds, sophisticated financial instruments, precious metals like gold and silver, currencies, commodities, real estate, works of art, collectibles or fine wines …