What is investing?

Investing implies giving capital to a person or an enterprise so that some actual product or service is created incrementally, benefiting the person, enterprise and in some way, all of us.

The low-risk version of this is lending money, because you are guaranteed to receive the money back (in theory). The safest form of this is lending to the government because they can always pay you back ;) But because it is safe, you will not get much more than your original money plus some interest.

The higher-risk version of this is buying equity. You need money, gimme a piece of your company. I may not get any money back if you fail, but when if succeed, I can get way more than I gave you.

There is NO other real way to invest. I hear sophisticated business acquaintances talk about investing in derivatives and CDS products; structured notes; etc etc. They are all gambles. But there are two types of gambling:

1. Hedging:  If I have a house and I do not want to lose everything if it burns down, I take an insurance contract. It is a derivative instrument as what it pays depends on an extrinsic event. Someone takes the risk, I pay them a premium.

2. Gambling: If you have a house and I want to make money if it burns down, I take an insurance contract. That derivative is a gamble. This is what a credit-default swap, or a CDS is.

Neither hedging or gambling is an investing activity. The hedge has the legitimacy of serving to protect an actual asset, an actual investment. The gamble has no redeeming features. This does not mean I have a moral position on gambling - I just think a spade should be called a spade.

It is difficult to clearly separate hedges and gambling. For example, maybe my livelihood as a stocking-vendor somehow depends on your house being the chick-magnet. So maybe that insurance on *your* house may make sense after all.

But no matter: it is easy to separate investing in securities or assets from everything else. Unfortunately, the financial press shocks me everyday using these terms fungibly.