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It’s Complicated – speculating for big returns…

Songstress Avril Lavigne wasn’t singing about investing but she’s right, “It’s Complicated”. Yesterday we covered the bottom line; there has to be profit on the bottom line before we accept a company as a possible investment. Today we discuss a very different story, speculation.

Speculation means accepting big risk pursuing fast and spectacular returns

Unlike the complex and conflicting emotions expressed in Avril’s song, speculating is far less complicated. Still, plenty complicated with all you have to know and the potential of unlimited risk.

How complicated? To speculate profitably you need the market as well as the specific vehicle and the timing to all be right. Markets have seasons and patterns. Local, regional and global economic and political events can have significant positive and negative impact while over time industries fall in and out of favor.

A profitable speculation requires you to be on the side favored by all the above circumstances. Still you must then buy well. This learned skill keeps you from buying poorly that can put you in a high risk position while jinxing any possibility of a big profit. Finally you must be selling when other willing buyers are still arriving to pay higher prices for your position.

When the right circumstances present themselves and you make correct, timely decisions, it seems like a simple way to quickly make big money. Looking into the future is always the foggy part.

Speculating or an accidental investor?

Miss any of the above points on speculating and you could become an ‘accidental investor’. That is a speculator who missed the last bus and can’t sell profitably to get home. That ties capital up in a dead position without profit.

That’s a dud. When a speculation turns out to be a dud, experienced players take their lumps. They sell even at a loss to get back some capital that allows them to move on and play another day.

Those sleeping at the switch, inexperienced, determined to hang on or worse of all, the unaware who thought they were investing, could wait a long time or forever. They may never see any return or even their capital.

Too often those ‘accidents’ get justified after the fact as investments. The now reformed speculator sells themselves on the idea that they didn’t make a mistake but are now a special situation investor. Their special situation is that they are poorer. Some get wiser, others not so much.

Not an anti-speculation rant!

When speculative stars line up, fantastic profits can be realized. It is a perfectly legitimate activity needed and in fact critical for capital markets to fully function. Speculation adds liquidity.

A beginner tempted by the potential of quick huge profit needs to carefully consider before treading into speculative territory. In my opinion this is no place for a beginner. However I do think you should be aware of speculations so you recognize them even if you decline to participate.

Know that:

1. there is much to learn

2. it takes time and effort to learn it

3. only speculate with high risk capital that you are prepared to lose

The market direction must be favorable and established. The industry must be in favor. Finally the specific stock selected must be among the winners. All that against long odds.

Should you choose to do it, be sure to look at the players backing and managing the venture. There are groups that do it well. More that don’t. Both have a history. Look at that history. That can provide big clues but no guarantees of what to expect. Often, winners win again and losers don’t.

Knowing who is behind a venture. Particularly in the resource sector that knowledge can significantly change the odds in your favor.

To speculate well in resources with a reasonable prospect of success requires meeting multiple criteria.

Resource speculating requires understanding:

1. the particular resource

2. the market for the resource and

3. the infrastructure needed to produce and deliver it

Canada provides an exceptionally good market and in fact the leading market to fund new and emerging resource companies. Canada has thousands of knowledgeable market players willing to consider financing such ventures. Still they only come in when the stars line up. Right now for mineral producers and resource startups, the circumstances are grim.

Resources are always a world play and there are alternative markets to Canada. The US which offers a market for the giants but a limited emerging resource investor base, London, with a good market but secondary to Canada and finally Australia focused on their domestically based international miners. There are others but those are the big ones.

Other sectors to consider include oil and natural gas; as investments they are different from one another but can and do offer speculative opportunities. However, knowledge and great care is needed here as well.

Many companies outside of the resource sector can also be used for speculations. In fact in all markets there are speculative opportunities. The basic approach can be used for large and small companies across every market sector including those with or without profit.

Yum yum when you get it right! Ouch! When wrong.

For a recent example, a good many people jumped on the Blackberry speculation betting BB would report good results and show strong new product sales. The buying pushed BB stock significantly higher from a low.

Unfortunately the results reported were considerably poorer than expected. The stock price immediately took a spectacular plunge. That particular speculative bet didn’t work out too well. It was a good one to miss.

A losing speculation can be less than a total loss. Frequently bailing early with a small loss is best as it preserves capital. But if you get it wrong all your capital could get toasted, 100% kaput, smoked, gone. Only play if you can accept and cope with the financial, emotional and psychological pressure and consequences without damaging your personal circumstances.

For now this very light scratch of the speculative surface will be sufficient. A legitimate but high risk approach to the market, speculation can produce spectacular returns under favorable circumstances. Should such a market develop we can further explore the details. For now, especially the junior resources remain mired in a severe financing drought.

Tomorrow we will discuss the third basic approach, trading. Until then, that complicated song will be stuck in my head!

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Have a prosperous day!


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