All this talk about bitcoin lately has brought back up the concept of speculating vs. investing. My advice always remains the same: have two buckets. The biggest one is where you don’t speculate at all, but where you invest your money at very safe, very low rates of return. The second smaller bucket is where you speculate all you like, knowing that you might make a lot of money, or may lose all of your cash in that bucket.
Doug Case recently put out an article where he talked about nine “secrets” for successful speculation. They are listed below with my comments.
Secret #1: Contrarianism takes courage.
Everyone knows the essential investment formula: “Buy low, sell high,” but it is so much easier said than done, it might as well be a secret formula.
I said the exact same thing just a few months ago. Buying low and selling high is so rarely done by human beings that it could indeed be considered some kind of bizarre secret. Buying investments when they’re crashing in price and selling your investments when they’re skyrocketing in price requires an immense amount of emotional control that most humans simply don’t have.
Secret #2: Success takes discipline.
It’s not just a matter of courage, of course; you can bravely follow a path right off a cliff if you’re not careful. So you have to have a game plan for risk mitigation. You have to expect market volatility and turn it to your advantage. And you’ll need an exit strategy.
The ways a successful speculator needs discipline are endless, but the most critical of all is to employ smart buying and selling tactics, so you don’t get goaded into paying too much or spooked into selling for too little.
Again, emotional control. It’s all about emotional control. That’s why I included an entire section in my book on the topic of emotional control; it’s such a key component to success and long-term happiness that is not taught in schools or by parents. Indeed, we live in an era where the average person has less emotional control now than ever before in Western history.
Secret #3: Analysis over emotion.
This may seem like an obvious corollary to the above, but it’s a point well worth stressing on its own. To be a successful speculator does not require being an emotionless robot, but it does require abiding by reason at times when either fear or euphoria tempt us to veer from our game plans.
Emotional control! Noticing a pattern?
Secret #4: Trust your gut.
Trusting a gut feeling sounds contradictory to the above, but it’s really not. The point is not to put feelings over logic, but to listen to what your feelings tell you—particularly about company people you meet and their words in press releases.
If a CEO comes across like a used-car salesman, that is telling you something. If a press release omits critical numbers or seems to be gilding the lily, that, too, tells you something.
A better way to say this than “trusting your gut” is “make sure to assess all the variables,” including ones that you don’t see by looking at a profit and loss statement or prospectus.
I once told the story about how I avoided complete financial disaster and a shitload of legal problems by not going into business with a guy who looked perfect on paper. My “gut,” i.e. one of the variables, told me to say no when everything on paper said yes (he kept delaying putting our contract in writing).
Secret #5: Assume Bulshytt.
(Bulshytt is not a typo, but a reference to Neal Stephenson’s brilliant novel, Anathem, which defines the term, briefly, as words, phrases, or even entire books or speeches that are misleading or empty of meaning.)
As a speculator, investor, or really anyone who buys anything, you have to assume that everyone in business has an angle. Their interests may coincide with your own, but you can’t assume that. It’s vital to keep in mind whom you are speaking with and what their interest might be.
Correct! EVERYONE has an agenda. EVERYONE! I do my very best on my blogs and in my books to be very clear and public about my agenda (I’m here to make money from you because I’m a capitalist and I love cash), but most people aren’t going to do this. It’s your job to uncover the true agendas of individuals, companies, groups, political movements, etc before you can make a rational decision regarding them.
Secret #6: The trend is your friend.
No one can predict the future, but anyone who applies him or herself diligently enough can identify trends in the world that will have predictable consequences and outcomes.
If you identify a trend that is real—or that at least has an overwhelming amount of evidence in its favor—it can serve as both compass and chart, keeping you on course regardless of market chaos, irrational investors, and the ever-present flood of bulshytt.
Knowing that you are betting on a trend that makes great sense and is backed by hard data also helps maintain your courage. Remember; prices may fluctuate, but price and value is not the same thing. If you are right about the trend, it will be your friend. Also, remember that it’s easier to be right about the direction of a trend than its timing.
Watching trends is mostly how I’ve been able to never lose money in my investment portfolio, so it’s certainly a valid technique. However, I need to add two things:
1. Trends can be wrong. Real and verifiable trends in tech, television, and entertainment told everyone in the 90’s that there would be 2,000 TV channels in everyone’s house by the 2000’s. Did that happen?
2. There can often be trends you’re not aware of. Back in 2012, I was wrong about Obama losing to Romney because I was unaware of a new trend of American voters going hyper-irrational; a trend that has continued with the election of Trump and will continue even further with the election of the nightmare president after Trump. Though he barely won (he won by less than 1% in three states), people re-elected Obama in the middle of a shitty economy, something that has never happened in my lifetime (and may never have happened in America; not sure). Voters didn’t care. Emotionally, they liked Obama regardless of the fact that their lives and their country were worse off, so they voted for him.
The point here is that following trends helps, but you can still be wrong. There’s still an element of luck involved.
Secret #7: Only speculate with money you can afford to lose.
This is a logical corollary to the above. If you bet the farm or gamble away your children’s college tuition on risky speculations—and only relatively risky investments have the potential to generate the extraordinary returns that justify speculating in the first place—it will be almost impossible to maintain your cool and discipline when you need it.
That’s why most of your money should be in your “never touch it, never lose it” bucket; the “boring” bucket that only makes 5% or so, but is safe. Most people don’t do this, and shove all or most of their retirement savings into the stock market, then freak out and lose mountains of cash whenever the market crashes, which it does all the time. Stupid.
Secret #8: Stack the odds in your favor.
Given the risks inherent in speculating for extraordinary gains, you have to stack the odds in your favor. If you can’t, don’t play.
There are several ways to do this, including betting on people with proven track records, buying when market corrections put companies on sale way below any objective valuation, and participating in private placements. The most critical may be to either conduct the due diligence most investors are too busy to be bothered with, or find someone you can trust to do it for you.
To me, this is just a repeat of item #4; consider all the variables, even the small ones.
Secret #9: You can’t kiss all the girls.
When you encounter a fantastic story or a stock going vertical and it feels like it’s getting away from you, it can be very, very difficult to do all the things I mention above. I can tell you from firsthand experience, it’s agonizing to identify a good bet, arrive too late, and see the ship sail off to great fortune—without you.
But if you let that push you into paying too much for your speculative picks, you can wipe out your own gains, even if you’re betting on the right trends.
Actually Doug, you can kiss all the girls, but that’s a different blog. In terms of his advice though, he’s right. Sometimes you need to just slap yourself in the face instead of jumping into something that has already seen its biggest gains. It’s hard to do (I could tell you stories), but it must be done sometimes.
In the end, speculation is dangerous. I’m not saying you shouldn’t do it. I do a little, but that’s the point. I do a little. The vast majority of my investments are in boring, stupid Grandma shit that isn’t exciting at all.
That’s why I don’t lose money, which is rule number one of investing.