What's Wrong With Speculation?

It's more than a little bewildering that most Americans don't believe that financiers, and the investment activities they facilitate, are a prestigious and morally beneficial part of society. While most folks would probably admit that financial markets are practical, they nevertheless view the chief participants in those markets with suspicion and contempt. How many articles berating "fat cat" private equity or hedge fund managers have you read in the last few months?

Indeed, the widespread belief is that financiers, especially speculators, succeed only by exploiting others. They are viewed as corrupt paper-pushers who punch a few keys on a keyboard to finagle their way to riches. We might begrudgingly admire the money-making prowess of a talented speculator, but it's not moral admiration, rather it's the suspicious respect you'd give a good pool player or a card shark.

It's an attitude best exemplified in the 1980s best-selling book "The Bonfire of the Vanities." Bond salesman (and "Master of the Universe") Sherman McCoy is asked by his daughter what he does for a living. Sherman's wife quickly explains that "Daddy doesn't build roads or hospitals, and he doesn't help build them, but he does handle the bonds for the people who raise the money." She then clarifies that "a bond is a slice of cake, and you didn't bake the cake, but every time you hand somebody a slice of the cake, a tiny little bit comes off, like a little crumb....and if you pass around enough slices of cake, then pretty soon you have enough crumbs to make a gigantic cake."

Again, the implication is that those of us in the financial markets aren't actually productive, but only parasites — creating nothing and becoming rich at the public's expense. What most people don't comprehend is that investing, even speculating, isn't just practical but moral as well. The profit motive that inspires us to get up every morning hungry to make money in our portfolios is an undeniably just and globally beneficial element of the human condition. Speculation shouldn't be demonized, but celebrated and promoted.

The morality of speculation has nothing to do with the "socially responsible investing" movement, which glorifies companies with board members from the Sierra Club or who pay their CEOs below-market rates. Nor is speculation only moral if, like Warren Buffett, you intend on donating all the money you make to charity.

What is moral is investing for your own sake, with the intention of making as much money as possible for your own happiness and enjoyment. This applies to all kinds of investors, from Ma and Pa Kettle with $10,000 in an E*Trade (ETFC) account to venture capitalists, mutual-fund managers, investment bankers and the despised speculator who bears the brunt of public outrage whenever gas prices go up or dairy prices go down.

All investment, whether it's venture capital, investment banking or short-term speculation, is a legitimate form of wealth creation. Investing literally means to allocate money to a business venture with the hope of earning a profit. In doing so, the investor brings new wealth into existence that benefits both the speculator and those he trades with, furthering human life and happiness. In my judgment, this makes it a highly moral activity.

It's the process of speculation and wealth creation that has provided us with the high standard of living that we take for granted each day. In America, even those at the bottom of the economic scale live in homes with furniture, televisions, telephones, DVDs, food, cars and other items that 300 years ago a king couldn't dream of attaining. Such achievements didn't automatically sprout from the ground. No, they required careful investment that entailed committing, allocating and risking capital for the productive purpose of generating a profit. As speculators, that's what we do.

If we invest well, we make money and create wealth. If we invest poorly, we lose money and destroy wealth. A bad investment is like a farmer who eats his stock seed instead of planting it: Instead of a field of corn, he has barren patches of land — and nothing to eat or sell. To that end, all investment and all wealth creation involves speculation. In a financial context, to speculate is to assess the productive significance of a business, venture or action. More simply put, speculation is a derogatory term for forecasting and judgment.

This not only applies to the individual speculator, but also the bank loan department, the hedge-fund and the private-equity player who creates and finances entire companies. All make rational judgments with their resources. Putting money into the hands of a young Bill Gates can literally transform the world. Putting it into the Pets.com sock puppet will simply piss it away.

To counter the "Bonfire of the Vanities" metaphor, we aren't taking crumbs off someone else's cake, but baking cakes. Or, to use a more precise analogy, we're putting the best ingredients in the hands of the best bakers, who otherwise wouldn't have the materials to make a cake. The way human beings survive and profit is not by being predators, hunting after each other's lives and wealth, but by being creators and traders.

The essence of human life is using our minds to create wealth that can provide for our own survival and happiness. Financers are an easy target for unions and politicians looking for a convenient scapegoat, but by speculating, investing and furthering our own lives and happiness, we deal with others in a mutually beneficial and productive way. If that's not moral, I don't know what is.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.