This No Worry Investor Guide: Speculative Investments for Portfolio Builders introduces high-performance stocks using cost control and market approach strategies. The guide offers a comprehensive approach to managing speculative investments as part of a wealth-building investment strategy. It discusses the critical strategies successful investors use, focusing on cost control, informed market approaches, and managing the risks and returns of speculative ventures. It equips investors with the tools to increase returns while mitigating risks and offers a clear path to building a productive, wealth-generating portfolio. Master these three essential keys to add speculative and high-performance stocks to your long-term portfolio-building strategy.
What You Learn About The No Worry Investor Guide: Speculative Investments for Portfolio Builders:
Managing risks, returns, and failure are important investing skills of superior investors that you can learn. Do that to join the skillful investors who work to increase returns while decreasing risks. They know risks and returns are related but not directly connected and each can be separately managed.
FAQs Investors Asked About The No Worry Investor Guide: Speculative Investments for Portfolio Builders
These questions and answers about managing speculation risks, returns, and failures have overlapping answers which help investors understand how stock markets, investing, and money-making interrelates.
Do high risks equal high returns?
High-risk investments can produce spectacular returns, but they are rare and more often unsuccessful as most high-risk investments are unreliable return producers and often deliver a complete investment loss.
Despite their extensive knowledge and experience, even the most successful speculative traders must inevitably deal with losses.
When seeking fast returns, speculative risks can complicate matters. In comparison, steady income-earning portfolios may seem dull. Still, they offer stability, security, and steady returns crucial for long-term wealth building.
What stock market investments have the highest returns?
Steady returns in all market conditions distinguish reliable income portfolios as the long-term victor. While less exciting than other strategies, consistent production produces the best results.
Conversely, trading has the highest short-term returns during favorable market conditions, which draw in knowledgeable and vigilant traders. However, performance falters in unfavorable markets, giving mixed overall results.
Meanwhile, perfect market conditions belong to the rare headline-seizing ventures. However, these remarkable triumphs are outliers, as most speculations lead to losses, including potential total capital depletion. As a result, speculations have a poor return record.
Why is speculative trading dangerous?
Speculative traders make high-risk capital bets, hoping to make significant profits. However, the assets they buy may have no value. They might be pre-revenue or have negative cash flow. While profit possibilities may exist, most speculations lose.
Successful speculations demand knowledge, skill, experience, and insight. Though short-term gains can happen, stock market history shows a different story. High-risk trading strategies have a long record of losses.
Although less exciting in the short term, long-term investment strategies differ significantly. Additionally, they have many different benefits. For instance, they generate steady, stable, and safe income. Over time, they produce much greater profit.
What are the dangers of speculation?
Speculative trading risks are akin to gambling and a threat to wealth. While the potential handsome profits allure investors, the significant risks include a complete capital loss.
While speculation does introduce liquidity to the market, it can also inflate a stock market bubble. And when bubbles inevitably burst, economic destruction follows.
Overall, speculations' unreliable and infrequent big payoffs pale compared to the long-term wealth-building performance of income-earning portfolios.
How do investment or stock failures improve markets?
Although painful for anyone losing money, failed businesses listed on stock markets are opportunities to reuse capital, a positive feature of capital markets. Selling or liquidating the failed businesses removes the weak operations from the market and recovers capital.
Investing the recovered capital in new or established companies helps them grow profitably. That improves markets and allows investors who experienced losses to move on as owners of new or successful business operations.
Are speculative investments worth the higher risk?
Speculative investments can be lucrative, but they come with risks.
Managing speculative investments requires more knowledge and time than trading or income investing, may not result in high returns, and has the risk of a total loss.
In contrast, income-earning assets offer steady and secure returns with little risk of loss, even in fluctuating markets.
Although that may seem dull compared to the excitement of speculations, these returns compound into major winners over time, making them the best choice for anyone serious about wealth-building.
So yes, speculative investing can be lucrative when you know what you are doing and have the needed knowledge. But most investors should avoid the risk by taking a pass or strictly limiting speculative investing.
Does stock speculation work for investors?
While speculations can be profitable, they involve high-risk ventures with many complications. Those complications can mean a failed investment or inconsistent outcome is more likely than a spectacular speculative return.
While high-risk investments occasionally generate significant returns, the result is often a complete loss. Such a loss can erase years of gains, deplete capital, and devastate portfolios.
In contrast, a less adventurous income-earning portfolio consistently accumulates safe returns. Over time, this steady and secure approach builds wealth without fail. This proven method has stood the test of stock markets for centuries. The record shows, without exception, income investing outperforms speculation over time.
What are examples of stock market speculative risks?
Stock market speculations come with numerous risks, including:
Volatility: Wildly fluctuating prices mean rapid gains and losses.
Market Timing: Impossible to time markets means counting on luck.
No Fundamentals: No earnings or growth uses hype, not facts.
Liquidity Risk: Buying or selling can move low-volume prices a lot.
Event Risk: Outside events add uncertainty and quick price moves.
Leverage: Borrowed funds amplify gains or increase losses.
Speculative Bubbles: Losses flow as hype-created bubbles bust.
Single Stock Risk: Few high-risk stocks mean risk overexposure.
Information Void: Insiders have an information advantage.
Psychological Bias: Overconfidence or FOMO biases move prices.
Managing risks takes thorough research and advice when needed.
How does stock speculation impact the economy?
Stock speculation can have both positive and negative effects on the economy.
Speculative ventures can launch and fund high-risk developments that create jobs and expand the economy. But those success stories are rare, as most speculative start-ups fail.
All economic activity, including speculation, adds complexity and risks, with the negative declining wealth of losers offset by the winners' gains.
That is creative destruction at work. The lost losers' capital goes into the expanded productivity, employment, opportunity, and profits of winners. The result is the prosperity of a strengthened and expanded economy.
Is speculation a type of trading?
Speculations are trades betting significant price movements will produce big returns to offset the possibility of a total loss.
High risks beyond what other traders can accept are OK for speculative traders aggressively seeking significant and fast returns. They are gamblers, the opposite of patient low-risk income or value investors.
In favorable markets, strongly rising prices can make speculations lucrative and exciting fun! However, speculative wins are much harder to find in volatile or down-trending markets. And total losses do happen!
In downtrends, knowledgeable and experienced speculators turn to short selling.
Why is high return so often high risk?
Risk and return are a tradeoff, with ever-higher potential returns coming with ever-higher risks. However, there is no direct relationship; accepting risk is not directly linked to enjoying a return.
That is where knowledge and skill enter the investment picture. In particular, risk management is a skill of informed investors with records of success. When fast money seeks spectacular returns, risks complicate matters, which puts risk management and control at or near the top of the to-do list of successful investors.
In contrast, steady income-earning portfolios may seem tedious, but their safe and stable returns build wealth over time. High risks do not always produce high returns and can have a record of delivering a total loss!
Why is speculative trading dangerous?
Speculative trading risks capital for a big spectacular win when it works! But, like a lottery ticket, all but a few speculations are losers. That is why investors must remember that speculative trading for big fast money comes with the risk of a capital loss. And such losses can be financial disasters, so any speculative wins must be enough to cover the all but certain losses of a high-risk strategy. In sharp contrast, steady income earning portfolios can seem sleepy, even while they pile up steady safe returns! While speculation hits can be substantial short-term wins, over time, investing for the long-term performs far better. That follows the wealth-building rule, steady and secure produces far more profit as it has over the centuries of stock market history!
Trading Investment Risk and Return With Speculative Investments For Portfolio Builders
High returns are often associated with high risk. However, the inherent relationship between risk and reward in investing is not a direct link. This concept is fundamental to finance and investment theory and several vital principles can summarize it:
Risk-Return Tradeoff With Speculative Investments For Portfolio Builders
Basic Risk-Return Principle
The risk-return tradeoff states that the potential return on any investment typically increases with the level of investment risk. While higher returns reward taking on greater risk, investors with knowledge and skill can manipulate the tradeoff.
Risk-Return Example
Stocks vs. Bonds: Conventional financial thinking suggests that stocks generally offer higher potential returns than bonds. However, stocks are also more volatile and carry a higher risk of loss. Bonds, on the other hand, offer lower returns but are considered safer. However, knowledgeable, skilled investors manage this issue.
Market Compensation With Speculative Investments for Portfolio Builders
Compensation for Risk
Investors seek higher returns as compensation for taking on additional risk. If an investment has a chance of losing value, investors only commit capital for higher returns.
Compensation Example
Startups vs. Established Companies: Investing in a startup can yield very high returns if the company succeeds, but there is also a high chance that the startup will fail, leading to a total loss of investment. Established companies are more likely to provide steady but lower returns.
High-Return Volatility and Uncertainty With Speculative Investments for Portfolio Builders
Speculative Investments for Portfolio Builders Seeking High-Returns Accept Volatility
High-return investments are often more volatile, meaning their prices fluctuate widely in short periods. This volatility increases the risk of loss but also provides opportunities for higher gains.
High-Return Volatility Example
Cryptocurrencies: Cryptocurrencies can experience extreme price swings, offering opportunities for significant gains but posing a high risk of substantial losses.
High-Return Uncertainty
Investments with uncertain outcomes tend to offer higher returns to attract investors willing to take the chance that the investment might fail.
High-Return Uncertainty Example
Emerging Markets: Investing in emerging markets can offer high returns due to rapid economic growth, but these markets are also subject to political and economic instability, volatility, and risk.
Lack of Historical Data With Speculative Investments for Portfolio Builders
New or Innovative Investments With No History
Inventive investment opportunities or new financial products with no performance history are inherently riskier. To attract investors, most promise higher returns.
No History Example
Technology Startups: Innovative tech startups might promise revolutionary products and high returns but come with the risk of technological or market failure.
Some Speculative Investments for Portfolio Builders Use High-Return Leverage
High-Return Use of Debt
High-return strategies often involve using leverage or borrowing to invest. While leverage can amplify returns, it also magnifies losses and increases the risk of insolvency.
High-Return Leverage Example
Leveraged Investments: Hedge funds often use leverage to enhance returns, which exposes them to greater risk if the investments do not perform as expected.
Risk-Return Market Efficiency With Speculative Investments for Portfolio Builders
Risk-Return Efficient Market Hypothesis
The efficient market hypothesis is academic nonsense. It states that each security price is already the product of all available market risk and return information. As a result, achieving greater returns requires accepting more risk than the market has accounted for. Any experienced, accomplished, knowledgeable, and skilled investor knows this hypothesis does not reflect the actual investment world. It is listed here to acknowledge it gets regularly dragged out to "explain" market behavior.
Risk-Return Efficient Market Hypothesis Example
High-Yield Bonds: These bonds offer higher returns to compensate for the higher risk of default, as the market has already priced in the likelihood of the issuer failing to make payments.
Risk-Return Behavioral Factors With Speculative Investments for Portfolio Builders
Risk-Return Investor Psychology
The allure of high returns can lead to overestimating potential gains and underestimating risks. Behavioral biases can drive investors to take on more risk than they can handle.
Risk-Return Investor Psychology Example
Speculative Bubbles: During market bubbles, investors may be lured by the prospect of high returns, ignoring the increasing risk of a market correction or crash.
Risk-Return Consequences
The relationship between high return and high risk is fundamental in finance. It reflects the reality that greater rewards are often available only to those willing and able to endure more significant uncertainty, volatility, and potential for loss. Understanding this tradeoff helps investors make more informed decisions based on risk tolerance and investment goals. Investors with knowledge, skill, and experience can learn to find more profitable opportunities in the imperfect investment market.
Reliable Income Investing Delivers Long-Term Success Compared to Trading or Speculative Investments for Portfolio Builders
Speculations
Before diving into the speculative end of stock markets, we take a moment for a broader overview. Various wealth-growing strategies to increase one's financial assets, are used in stock markets. From the steady and reliable income streams of dividend-paying stocks to the adrenaline-fueled world of speculative investments, each approach has risks and rewards. However, reliable income investing emerges as the clear winner for long-term success and sustainability.
Investing Vs. Speculative Investments for Portfolio Builders
Reliable income-streaming portfolios, while not particularly thrilling, offer a sense of security and stability. They steadily and safely accumulate returns in all markets, making income investing the long-term winner. This consistent progress should reassure you of its reliability and predictability.
Reliable income-streaming portfolios accumulate returns steadily in all market conditions. These portfolios typically consist of assets such as dividend-paying stocks or other income-generating securities. While the progress may not always be flashy or exhilarating, the consistent returns provide a stable foundation for building wealth over time.
Trading Vs. Speculative Investments for Portfolio Builders
Trading, on the other hand, can yield the highest short-term returns in favorable markets. However, it's crucial to be aware that trading performance can be poor in unfavorable markets, leading to a mixed overall result. This should make you cautious about the potential risks involved.
Unlike income investing, trading focuses on capitalizing on short-term market fluctuations to generate profits. When markets are favorable, trading can produce high returns, attracting knowledgeable and attentive traders seeking quick gains. However, trading delivers an overall mixed result. The volatility and unpredictability of short-term market movements makes trading riskier which can mean significant losses for inexperienced or ineffective traders.
Speculations
At the extreme end of the spectrum are speculations, investments that involve a high degree of risk, uncertainty, and the potential for significant gains or losses. These are the headline darlings, and the subject of countless, and sometimes true, stories of overnight fortunes. However, the perfect market conditions for such spectacular short-term gains are rare, and for every spectacular winner, there are countless losers. Speculative investments, including penny stocks, cryptocurrencies, and high-risk ventures, often result in losses, including the risk of total capital loss. While the allure of quick riches may be tempting, the reality is that speculative investments typically yield poor returns over the long term.
Wealth-Building Investments
While trading may offer the allure of high short-term returns, and speculations may capture headlines with the occasional spectacular wins, reliable income investing stands out as the consistent long-term winner. By building a portfolio of income-generating assets that provide steady and predictable returns, investors can weather market volatility and achieve their financial goals with greater consistency and reliability.
Ultimately, the key to successful investing lies in understanding one's risk tolerance, conducting thorough research, and adopting a disciplined approach tailored to long-term wealth accumulation. While the excitement of trading and the allure of speculation may be tempting, the steady progress of income investing remains the steadfast path to financial success in all market conditions.
High-Yield Investment Alternatives to Speculative Investments for Portfolio Builders
Investing in the stock market can be highly rewarding, with the potential for significant returns. However, there are high-yield returning alternatives to stock speculations. With all such investments it's important to approach them with a balanced understanding of risk. Consider the following various investment opportunities that have historically delivered substantial returns, but that also come with varying levels of risk.
Individual Stocks: High Reward, High Risk
Investing in individual companies, particularly those with strong growth potential, can lead to significant gains. Tech giants like Apple, Amazon, and Tesla are prime examples of stocks that have seen tremendous growth over the years. However, picking individual stocks demands extensive research and risks considerable losses if the company underperforms.
Growth Stocks: Riding the Wave of Expansion
Growth stocks represent companies expected to grow above average compared to other firms. These companies often reinvest their earnings into expansion, acquisitions, and research and development. Many tech companies and innovative startups fall into this category, offering high returns for investors willing to take on the accompanying risks. However, it's important to note that growth stocks can be more volatile and subject to market fluctuations than other types of stocks.
Small-Cap Stocks: Big Potential in Smaller Packages
Small-cap stocks, or companies with market capitalizations between $300 million and $2 billion, can offer substantial returns due to their growth potential. Market capitalization is the total value of a company's outstanding shares of stock, calculated by multiplying the share price by the number of shares. While these companies have more room to expand, they are also more volatile and present higher risks than larger, more established ones.
Sector-Specific ETFs: Focused Growth Opportunities
Exchange-traded funds (ETFs) that concentrate on specific high-growth sectors, such as technology, healthcare, and renewable energy, can provide robust returns. By spreading investments across multiple companies within an industry or sector, these ETFs mitigate risks associated with individual stock investments while capitalizing on sector-wide growth trends.
Emerging Markets: Tapping into Global Growth
Investing in stocks from emerging markets, which are economies that are progressing toward becoming advanced, can yield high returns thanks to the rapid economic growth in these regions. However, these investments have heightened risks, including political instability, currency fluctuations, and financial and market volatility. Emerging markets offer exciting growth opportunities for those willing to navigate these uncertainties, but it's important to be aware of the potential risks.
Venture Capital and Private Equity: High Stakes, High Rewards With Speculative Investments For Portfolio Builders
Venture capital and private equity can fund startups and small businesses with significant growth potential. While these investments can offer substantial returns, they are typically accessible only to accredited investors due to their high risk and long-term nature. The potential for high rewards makes them an attractive option for those who qualify.
Initial Public Offerings (IPOs): Getting in on the Ground Floor
Investing in companies during their initial public offerings (IPOs) can sometimes result in impressive returns if they perform well post-IPO. An IPO is the first sale of a company's shares to the public. However, the overall record shows that most IPOs fail to trade above their listing price after the initial excitement. IPOs are often volatile and unpredictable, requiring investors to have a high tolerance for risk.
Cryptocurrencies: The Frontier of Speculation
Although not traditional stocks, cryptocurrencies like Bitcoin and Ethereum have delivered extraordinary returns for early investors. Cryptocurrencies are digital or virtual currencies that use cryptography for security. However, as assets looking for a purpose, they are highly speculative and volatile, making them risky but potentially rewarding speculative trades.
Balancing Risk and Reward With Speculative Investments for Portfolio Builders
While the allure of high returns is enticing, it's crucial to understand and manage the associated risks. Diversifying your investment portfolio can be a prudent strategy to balance risk and aim for higher returns. Seeking guidance from a financial advisor can provide personalized insights tailored to your financial goals and risk tolerance, ensuring you're well-prepared for your investment journey.
Investing in the stock market is a journey that requires diligence, research, and a clear understanding of your financial objectives. By exploring various high-return investment opportunities and balancing them with prudent risk management, you can confidently navigate the market and work towards achieving your financial aspirations.
Speculative Investments for Portfolio Builders Come With Many Risks
Investors who speculate expose themselves to the unique risks of each high-risk stock and the many broad risks brought on by all speculative stocks, including:
Volatility:
Speculations expose investors to unpredictable price volatility and fluctuations that produce significant rapid price gains or losses.
Market Timing:
Speculative investors often attempt to time the market to buy low and sell high. However, consistent and accurate market timing is impossible, making such speculation bets on luck.
Lack of Fundamentals:
Speculative stocks often lack fundamental earnings, revenue, or demonstrated growth potential, relying on hype, speculation, and sentiment rather than facts.
Liquidity Risk:
Speculative stocks often have low or no trading volumes, so buying or selling larger positions can significantly move the price. That can put the investor's money into the promotors' pocket.
Event Risk:
Speculative investments can react to external events such as regulatory changes, industry disruptions, or geopolitical tensions to produce rapid price changes with more uncertainty.
Leverage:
Investors borrowing margin funds amplify speculative gains as they increase the loss potential if the price moves against them.
Speculative Bubbles:
Excessive hype and investment frenzy create overvalued market bubbles that burst, leaving investors with major losses.
Single Stock Risk:
Speculative investors in one or a few high-risk stocks risk overexposure to underperformance or adverse events.
Information Asymmetry:
Speculative investments with limited public information give insiders and institutional investors advantages.
Psychological Bias:
Speculative investments and psychological biases like overconfidence, fear of missing out (FOMO), or a herd mentality can lead to irrational loss-producing decisions.
Investors must conduct thorough research and seek advice when needed to understand and manage speculative investment risks.
Choosing Speculative Investments for Portfolio Builders
We will first discuss speculation, an aggressive trading strategy, as a choice and the risks as well as the returns from this approach to stock markets. Then we take a look at the possible consequences when failures happen and the lessons that failures teach.
Understanding Speculation and Risk Management in Stock Market Strategies
While we cover stock market speculation strategies, we must also consider how superior investors think about and manage risk. That thinking and risk management change with each of the 3 basic stock market approaches, investing, trading, and speculating. Most often, the highest risks fall to the speculating strategies. And while speculation risks can be higher, the huge and possibly fast returns from successful speculations will always be a great attraction.
But speculation is a choice and will always remain a choice. There is no requirement to buy any speculative stock or consider it part of a normal or typical stock market investing. That means there is no need to include any speculative investment or trade in a stock market in investment portfolio.
In fact, it is best to consider speculating is a specialty part of stock market investing. And most people do not speculate and in fact avoid speculating. And for someone new to stock markets and investing, speculating is not the place to begin learning about wealth-building, investing and investments. First, learn the basics and gain experience by successfully building an investment portfolio before you consider any speculative investment.
Playing speculations and the risks of failure
By looking at examples of speculation failures we can learn the high costs and loss of capital that are possible. It can seem ironic, but speculation success and failures can both serve to improve markets as well as the skills and performance of an individual investor.
Weighing the Risks and Rewards of Speculation
But for most people, the way to improve your investing performance is by avoiding the costly experience of making bad speculative decisions. So it helps to know the risks of speculations. And, most often, an informed investor will find themselves better off by giving speculations a pass. That will keep your money and make it available to go to work for you earning a return from a productive investment.
But the attraction of speculations are clear – those huge and possibly fast payoffs! Investors can speculate on any company from an idea or concept stock, a tiny startup that could disrupt an industry, or a large established enterprise. In most cases, the big risks and huge potential gains are most extreme among the startup and emerging junior companies.
Although risks can complicate those spectacular returns, pursuing fast money plays can be very exciting! In contrast, income portfolios offer boring, safe returns! Still, when comparing the results of long-term wealth building, investing beats speculations over time, every time! High risks do not always produce high returns and can produce total loss!
Failures Teach Investment Lessons
There is another way speculation failures improve our investment performance. Failures, when they tach us something useful, can change our thinking and behavior for the better. That can make a bad stock market experience into a valuable lesson that helps us learn about markets and improve our future investment results. And helps us to develop the thinking and behavior of a superior investor.
Speculations are not income earners
Speculations are not income-earning investments. They may prove to be great trades or very high-risk gambles but most have no or a limited ability to produce income. As such they are not investments which pay the investor to own them. At least that is the White Top Investor approach to investing.
Speculations: High Returns with Higher Risks
But while speculations do not pay, they offer the possibility of much higher returns, much faster, than investments. Along with the possibility of high returns, most speculations come with higher risks than investments do. Those risks can be modest or extreme. But as always risks can be understood and managed. And the better speculators develop good risk assessment and management skills.
The Danger of Total Investment Loss
The highest risk speculations have the possibility of a total investment loss. However, most often, that high potential for loss is not offset by a high potential reward. That is a very critical point. And beginning investors should be aware so they can avoid the extreme risk trap.
Beware of Scams in Speculative Investments
Unfortunately, many cons lurk under the cover of offering speculative investments. They all set money traps the seek to ripoff investors who suffer a total investment loss. To protect yourself, any beginner should never consider or have anything to do with any speculative investing play.
Understanding Risk vs. Reward
It's essential to recognize that increased risk does not directly tie to higher rewards. Risk and reward are associated but do not directly offset one another. Media give disproportionate amounts of attention to trading and speculating. Unfortunately, that noise and uninformed commentary can mislead new investors. All investors must develop the ability to filter media noise.
Extreme Speculation Risks, Returns and Failures
When considering speculating there are many that do work. I have had great success with speculations, but that came with lots of experience, time and knowledge. Anyone interested can do the same. But it does takes considerable effort and time. And the greatest lesson learned from my speculation success is that risk avoidance is a powerful investment skill.
Prioritize Risk Avoidance in Speculative Investments
For that reason, I do my best to get investors, traders, and speculators to keep risk avoidance at the top of their money making checklist. The applies in particular at the most extreme end of all high-risk stock market strategies. In most cases, speculation can cross the line into gambling when you do not know what you are doing. In fact, in legitimate casinos, the gaming odds can be considerably better than among the more extreme speculative plays.
Legitimate Money-Making Opportunities in Speculations
But speculations can also be legitimate money making opportunities. For example, year in and out, the junior mineral explorers are the largest speculative stock group in Canada while in the U.S. the Over The Counter (OTC) Market holds the dominant number of speculative plays. In the, Oh Canada and our one place to trade lesson, the Canadian markets including the TSX Venture Exchange were discussed. In the, Sorting through the other American markets post, we discussed the OTC Market.
Like other enterprises, there are both legitimate and shady undertakings in the investing world and more so in the speculative end of the markets. A disproportional amount of both manipulation and outright fraud occurs among speculative stocks.
Navigating the Shady and Legitimate Sides of Speculation
Still, there are also legitimate and real emerging companies, excellent discoveries and and huge investment winners! Enough big winning plays happen to keep investors coming back hoping to catch the next big one!
Seek Guidance or Avoid Speculation Altogether
Should you be tempted, before you get anywhere near this high-risk jungle, get help. Have an experienced, knowledgeable, and honest guide. But better yet, in my opinion, for most people, your financial security will be best served by simply staying completely away.
Common Approaches to Speculative Investments for Portfolio Builders:
Trading on steroids
Rip Van Winkle trades
Covering these speculative trades is an extension of our trading discussion. We first discussed, Trading: an aggressive play and then momentum investing as methods of seeking bigger gains, faster. Now with speculating we look at the most aggressive and risky approach to trading.
Trading on steroids
Trading on steroids essentially means buying stock as it rockets up to ever higher prices on increasing volume. These are buying frenzies of raw greed as we race to get in at ever higher prices. The ride can be exhilarating but the risk is the deal may blow up or amount to nothing which vaporizes the opportunity along with our money!
Using this approach, it is best to waits for the wild run to start before buying. However, not being in at the bottom means missing the biggest gains. But on the plus side, it also means not being stuck with a dead money investment that never moves.
Like any trading, the most important skill remains to get out while there are still buyers willing to pay a higher price. Most especially junior exploration speculations frequently come to a rapid and losing end once the buying frenzy passes.
Rip Van Winkle trades
Rip Van Winkle trades involve buying many junior speculations and waiting for them to move. Speculators using this approach sit on investments in many dormant penny stocks. They hope for a few good ones among those they pick. When it works, the overall payoff can be a handsome return on the total capital put at risk. For these so inclined the long wait and research needed make the long odds worthwhile.
When such sleeping stocks do wake up the returns can run to multiple hundreds of percent! Those are the happy stories; but most go nowhere fast and are simply dead money. Even the majority that do move quickly flame out but a few do go from pennies to dollars.
In extreme bull markets riding speculative stocks can produce phenomenal gains but always come with very phenomenal risk. Prices move on news, rumor, or simply lies. News or rumor of a discovery, major business, political or environmental event can trigger huge and fast price movements as more buyers pile in.
Pennies to dollars
Buying a position in the stock of an affected company before such news can turn pennies into dollars. Then, once the story breaks, the action gets fast and furious and can make a considerable return for those with a good knowledge of the company, opportunity and the market. Knowledgeable people with their homework done can do very well. But is does require the investor to pay close attention to the market. Not a beginner play.
In Canadian junior resource penny stocks, there are many way to play the speculation game. That can be made to work for an experienced investor that makes the effort, is willing to build the knowledge and has the time to play. However, it takes considerable time, effort, and knowledge to learn. Beginners stay away. You need an escort here.
Speculative Investments for Portfolio Builders Accept Big Risks Pursuing Fast Spectacular Returns
Most investors avoid speculations and the associated risks. However, awareness of speculations and risks helps you understand this aspect of stock market investing. Awareness of the risks helps you decide if, when and how you may speculate on the opportunity to seize a huge gain. By better understanding the risks of this aggressive strategy, you can decide when it may work and when to avoid speculation.
Speculation Complications and High Risks
Speculation complications trade risks for spectacular returns exposed to high risks. The complications come because there is plenty you have to know including the potential of huge losses. And that can get very complicated.
The Importance of Timing and Market Conditions
How complicated? To profit from speculation you need the market as well as the specific stock and the timing to be right. That is a big ask. But all markets have seasons and patterns. As well, local, regional, and global events can have a significant market impact. And when is comes to seasons, as an example, resource industries fall in and out of favor and can be considered an unfavorable sector for years.
Buying Well is Crucial in Thin Markets
Profitable speculation needs you to understand the above circumstances. Of greatest importance, should you decide to play, you must also buy well. Doing that in thin specialty markets is a learned skill. To miss this point and buy poorly jinxes any possibility of large profits. You must never pay too much!
Know When to Exit
Finally, you must know when it is time to leave. And you can not be the last one at the party but sell while willing buyers can be found. That means those late to leave get locked in a money trap! Or can not get out with the best gains.
The Challenge of Consistent Success in Speculation
Experienced speculators always leave while willing buyers continue to arrive. So for money making opportunities, speculations can be attractive. But speculating for big returns always gets complicated. In the right circumstances the correct, timely decisions, can make big money fast. As always, looking into the future remains the foggy part.
The Ongoing Challenge After a Successful Speculation
However, with speculations, there is another rub! Even when a speculation delivers a great return, at the end of the play, you are sitting on cash. You had to sell to take your profit so you must find another speculation to keep the returns coming. Doing that well with consistency is a huge challenge. And market seasons have a big influence on speculative opportunities.
Speculative Investments for Portfolio Builders, or an Accidental Investor?
Miss any of the above points on speculating and you could become an ‘accidental investor’. That is someone who speculated but missed the last bus at the end of the party and can’t sell at a profit. They then claim to be they are investing for the long term! But caught in a money trap, their special situation is that the speculation did not work for them and they are poorer. Some get wiser, others not so much.
Failed speculations are never investments. Far worst, a failed speculation kills money. Holding a failed speculation ties up capital in a dead position unable to earn profit. They may never see any return or even any capital. That’s a dud. When speculation turns out to be a dud, experienced players take their loss and move on.
For years I kept evidence of a missed speculation exit on my portfolio statement as a reminder, don't make that mistake again! Experienced speculators take their loss, get back what capital they can. Doing that allows them to move on and play another day. Don’t hide behind the thought that speculating for big returns gets complicated. When you realize you have a dud, get out!
No Anti-Speculation Ranting!
The inconsistency of speculative returns is why the steady returns of an investing strategy can pass the overall long-term performance of a speculation strategy. This is not a blanket condemnation of speculation, I have enjoyed stunning returns on speculations! You can too.
However, only speculate when the timing of the market as well as the sector and stock are right. you have to know what you are doing, the returns are not steady, dependable, or always available. That is why investing produces far better returns over time.
But, when stars line up, speculative stocks produce fantastic profits! It is a legitimate and useful activity. In fact it is a critical part of the capital market function. Speculation adds liquidity. And when the timing is right, speculations can produce a nice addition to the performance of an otherwise conservative investment portfolio.
When speculating, beginners can luck out. But an active and engaged teaching mentor is the best way to learn. It is no place for a beginner to be alone. Even superior investors with no interest in speculation, benefit from knowing and being able to recognize the differences between speculation, trading, and investing.
Traders Who Speculate Well: With Speculative Investments for Portfolio Builders
1. have considerable trading knowledge and experience
2. spend time and effort developing speculative skills
3. strictly control costs, risks and limit speculative capital
Speculators monitor markets so they are aware when market direction and circumstances favor money making speculating trades. As well, the industry that interests the speculator, must be in favor. And finally, the specific stock selected must be among the speculation winners before they put any speculative capital to work.
And most times, in most markets, most sectors as well as most stocks, are not good speculations. Most times, the timing is not right, speculations play against long odds.
Should you choose to speculate, be sure to look at the players backing and managing any venture you pick. There are management and promotional groups that do it well. But there are many more that don’t. And all have a history, so look at that history. Doing that can provide big clues, but no guarantees of what to expect. Often, winners win again and again but not losers.
Knowing the players behind a venture can significantly change the odds in your favor. Most particularly, in the resource sector that knowledge of management and their history can help you judge if you should speculate in that venture.
Specialty or Resource Speculative Investments For Portfolio Builders
Speculators:
1. know the resource, business, or investment specialty
2. know the resource or specialty market
3. know the relevant infrastructure
Canada offers the leading market to fund new and emerging resource companies. Canada also has thousands of knowledgeable market players willing to consider financing such ventures. Still, they only buy in when the stars line up and the timing works for them. The timing cycles for mineral producers and resource startups and producers are very long and complex. But anyone interested can learn them as a part of understanding markets.
Resources sectors are always a world play and there are alternative markets to Canada. And the US has room for giants but a limited investor base for emerging resource companies. At the same time, London has a good market but is secondary to Canada. And Australia seems content to remain focused on its domestic base of international miners. There are others but the above are the biggest.
Oil and natural gas
Also, consider oil and natural gas as resource plays. They are each different but do offer speculative opportunities. Again, use knowledge and great care here as well. Speculating for big returns gets complicated and takes lots of time and effort to do well.
You should also be aware that resource speculations go through long periods of chill. Don’t try to play a market that does not exist. When resource markets are suffering a winter chill, don’t go near them.
More recently, cryptocurrency and marijuana have ridden spectacular speculative waves. Electronic vehicles and emerging technology including AI (artificial intelligence) listings have also moved far above any justifiable price level. That introduces the last point, don’t ride speculations down as they can come back to Earth very fast!
Speculation Opportunities Abound With Speculative Investments For Portfolio Builders
Speculation opportunities are everywhere. Speculators act when opportunity knocks. Many companies outside of the resource sector offer speculative opportunities. In fact, in all markets, there are speculative opportunities. The basic approach for all speculations remains the same. Yum yum, when you get it right! Ouch! When wrong. Losing speculations can mean a total loss.
Losing Speculations Can Be A Total Loss
But 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. But the market has to be there; we can’t push for speculation opportunities.
Speculation opportunities happen again and again. There is no absolute formula as next time will always be somewhat different. Anyone interested has to wait until the speculation opportunities unfold, then act. For example, as this lesson is being updated, cryptocurrency and marijuana-related listings have provided a wide array of speculation opportunities.
When Speculations Go Wrong
Losing speculations cost real money! The example of a speculation failure can be an example of any investing miss. In any case, the bottom line and your pride can take a hit when a failed investment or speculation crashes and turns capital into smoke. Speculating losers can deliver lessons including fast failure, courts kill money, never average down, sell losers, and avoid psychology games and litigation.
6 Lessons From Speculation Losers:
- Speculations fail fast and often completely!
- Courts are expensive places that kill money dead!
- Never average down!
- Sell a speculative loss and get the money to work!
- Psych games cost and are never good investments.
- Litigation is a high-risk gamble.
Dad Taught Me Life Lessons!
A very long time ago, when I was a boy, a running family joke developed about my Dad’s misadventures. Dad was a creative guy, receptive to new ideas, approaches and always willing to experiment. At times some projects went spectacularly off the rails!
On such occasions, when something did not go as well as hoped, he would look at me and say, “let that be a lesson to you!” It was as if the latest disaster was arranged specifically to teach me another life lesson! I learned to, “be careful around this man”!
Passing On Dad’s Lesson
After a speculation blowup turned money into smoke, I felt like my Dad must have felt on some of those occasions. So to pull some good from my disaster, I hope, this can be a lesson to you!
Once, one of my speculative technology flyers lost a major court case. Although management was confident the case was theirs to win, they didn’t! The jury said no! In the minutes after the announcement, almost 30% of the stock value evaporated! Hard to think speculation failures improve investing when my 50% upside was gone in a blink!
Speculations Fail Fast
When speculations don’t work, consequences are quick and costly. Losing in court also made the stock a loser. When you have a loser, it is best to take the hit, accept the loss, and move on.
Taking the First Loss is Often the Best Decision
Most often, when you're on the wrong side of a deal, taking that first loss is the best loss. It is the cheapest loss because, in most cases, the stock continues to fall. Selling early helps you avoid further decline and the aftermath of trying to recover.
Dead Money in the Technology Sector
The technology sector has dozens of companies with shareholders still "holding on," waiting for a big comeback. Unfortunately, that money is dead. The facts show that most comebacks don’t happen for shareholders after bad news.
Get Out and Reinvest to Improve Returns
Speculation failures improve your investing when you cut your losses and reinvest. Getting what you can out of a failing investment and putting that money into a productive asset helps you move forward and start earning returns again.
Refinancing Often Diminishes Early Investors
In cases of technology company setbacks, the technology may survive, but refinancing or restructuring often dilutes the early investors. In such situations, sticking around usually leads to more loss rather than recovery.
Shareholder Value Erosion in Market Overreactions
Even when there’s no risk of a company going out of business, the market reaction can be severe and overdone, punishing the stock. Shareholder opinions and even facts might not matter much in these situations, leading to financial losses. In many cases, it’s best to cut losses and reinvest elsewhere, rather than hoping for a recovery that may never come.
Courts Kill Money
Lost court cases turn funds invested into dead money. The speculative bet was wrong so salvage any money you can by selling. Bring the money back to life; put it into a positive producing investment situation. Don’t speculate on a court case. Courts can produce nutty or bad business decisions.
Never Average Down
That is never, NEVER average down by buying more at lower prices on the theory that your average cost gets you closer to break even. The average down theory says that a much smaller recovery gets your money back.
Even when that approach works, you neutralize even more money than the initial investment in the speculation. That is putting good money after bad. Stocks take time to recover. Averaging down means you have even more under-performing capital tied up for a long time. Combined, these factors harm your overall portfolio performance.
When your speculation goes down, admit you were wrong. Sell out and get what you recover back to working for you. When you lose, better to sell out. Stop the pain. Most importantly, get that money working for you in a performing investment. The net result will improve returns.
Sell A Speculative Loser
If or when you speculate and have a failed speculation, sell to improve your investing. When a speculation or trading position does not work as you wanted, sell. Face facts; the speculation did not work. The only response is to sell. Get out of a loser. Recover the capital you can and move on by putting the remaining money to work in a positive position. Your speculation lottery ticket didn’t win. Accept it. Move on and make money.
Psych Games Lose Money
Engaging in psychological games with yourself in the market can be extremely costly. Avoid making mid-stream strategy changes to justify a bad investment. Don’t try to reframe a losing speculation as a long-term investment or find reasons to hold on when you should sell. Accept that some investments will be losses—sell them, move on, and use the experience to improve your overall investing performance.
Litigation Is High Risk
The majority of my operating business career was managing turnaround situations. Litigation was often part of those business projects. As a result of a string of successes, I grew comfortable and confident around litigation. That gave me the false confidence that I could make investments when litigation was part of the scenario. I began thinking I could pick the winning side in business litigation cases. That was a foolish mistake.
A record of success when controlling the situation was very different from being an investor in a company involved in litigation. That is why every competent litigation lawyer advises, litigation is always a crapshoot, you can never know what a court will do or decide.
Betting on the outcome of litigation is very high risk. Trying to make money betting on the outcome of a court case is a very high-risk bet closer to buying a lottery ticket than to investing. Let’s hope my speculation failures improve investing for you so my losses become lessons that you profit from!
Failures Improve Stock Markets
Speculations can produce big returns but high speculation risks can produce failures and possible total losses. Those investment failures can improve dynamic ever-changing stock markets. That is part of the ever-changing evolution of investing.
continually evolves while recording many successes, some failures, and a number of struggling listings. By clearing out failures, investors move on to other opportunities, and markets gain strength by leaving the weak behind. That cleansing effect of capitalism supports greater economic strength. By removing failures, the effect improves markets and the economy that enables investors to move for improved returns.
High Risk - High Return Question Answered!
Experienced investors know the skill of managing risks and returns as they work to move returns up while lowering risks. Knowing risk and return are related but they also can be moved independently of the other. Knowing complications, risks, and shortcomings of speculation strategies may deliver spectacular but too often at higher risks.
Lesson Takeaways, No Worry Investor Guide: Speculative Investments for Portfolio Builders:
Managing speculation risks, returns and failures are wealth-building skills used to seek high returns in speculative plays with risks including possible failures or a total capital loss.
- Speculation is a choice with risks that can be high
- Speculations do not earn income
- Speculations can be trading on steroids
- Rip Van Winkle speculations
- Speculators know the subject industry and market
- Junior resources can be great speculations
- Speculators know how to buy well
- Speculation failures teach lessons
- Speculations can be fast and complete failures!
- Courts kill investor money!
- Never average down!
- Sell losses to get money back to work!
- Don’t play mental mind games to justify bad speculations.
- Litigation is a painful costly, bad bet. Always avoid this risk!
- Failures improve stock markets by getting removed.
- Only use high-risk capital to speculate.
Other lessons related to managing speculation risks, returns, and failures
Investing buy high sell low – true or false
Headline news and stock market risk
Know the trend for market direction
Weeding your investment portfolio
Nelson Mandela touched investors
Investors can deposit and WAIT!
Being an exceptional investor builds wealth
6 Small investor advantages Warren Buffett knows
Stock market corrections – Seize the day or cover
Smart investors use smart diversification
More time in means more money out!
Winston Churchill sees opportunity in crisis
Comments and Questions About No Worry Investor Guide: Speculative Investments for Portfolio Builders welcome
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Money Choices Grow Wealth, lesson links:
Introduction to Money Choices That Grow Wealth Lesson 1
3 Basic stock market strategies Lesson 2
Investing factors time and knowledge Lesson 3
Stock market trading strategies Lesson 4
Speculation risks, returns and failures! Lesson 5
Next course: How Investors Track Money
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Bryan Kelly
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