Speculating Versus Investing
 
Ben Graham’s viewed stock prices metaphorically as being offers to buy and sell from a business partner called Mr. Market.  He thought of Mr. Market as a neurotic businessman who's mood can fluctuate anywhere between incredible cheery optimism and an overwhelming dismal outlook.  Mr. Market in one of his manic-depressive phases could wildly depart from its true stock value, but in the long-run the stock will come in line with the business's true value. This is the basis behind the famous Ben Graham quote, "In the short-term the market is a voting machine, in the long-term, a weighing one."
 
Ben Graham, in The Intelligent Investor states that, "Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to…the operating results of his companies." 
 
Unfortunately, countless speculators rejected this basic principle of a company's stock price having relation to its value.  In the dot-com boom, companies that generated no profit and had very little, if any, value were selling at astronomical levels. Only a few years later, most of the dot-com stocks fell more than 95% from their highs or went bankrupt.  This provides evidence that the stock price will eventually adjust to reflect the true value-- present value of the projected cash flows to stockholders-- of the underlying business.
 
Ben Graham wrote in The Intelligent Investor, "Where the speculator follows market trends, the investor uses discipline, research, and his analytical ability to make unpopular but sound investments in bargains relative to asset value. Graham coaches the investor to develop a rational plan for buying stocks and bonds, and he argues that this plan must be a bulwark against emotional behavior that will always be tempting during abrupt bull and bear markets."

Warren Buffett wrote in his 2000 Annual Report, "To be sure, an investor needs some general understanding of business economics (See "Basics of Business Economics") as well as the ability to think independently.  But the investor does not need brilliance or blinding insight."  If you understand the changes in the factors that affect future earnings: level of differentiation from competitors and level of demand, you can determine the business' long-term value.  The more complex and shifting these two factors that affect future earnings are, the harder the task of determining the business' value.
 
Warren Buffett in his 1994 Annual Report says, "Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn’t count. If you are right about a business whole value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables... Our investments continue to be few in number and simple in concept: The truly big investment idea can usually be explained in a short paragraph. We like a business with enduring [differentiation] competitive advantages that is run by able and owner-oriented people."

To conclude, Ben Graham says in a lectures on speculation in relation to security analysis in Rediscovering Ben Graham, Lecture #10:

“An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative...And what is most important and most dangerous, we all want to get more out of Wall Street than we deserve for the work we put in."