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.

13 Comments on “How To Speculate Successfully

  1. A little off topic, but I hope still relevant(about get it in writing, to avoid losing).

    How about for some general deal like your guarantee on your products, Caleb? Are we shouldn’t take for granted, just only from “online persona” on internet?

  2. “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.”

    These days is this bucket limited to the gilts/bonds market, or are there other safe ~5% investment opportunities you would suggest people do some research on?

    I’ve seen this type of safe return mentioned elsewhere, but in my experience the returns are either much lower (normal domestic bank savings accounts) or it carries risk (foreign bank accounts, most types of investing).

  3. Your English is a little poor so I don’t understand your question. Perhaps rephrase?

  4. “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.”

    I’ve seen this type of safe return mentioned elsewhere, but in my experience the returns are either much lower (e.g domestic savings account) or carry risk. These days is this bucket limited to the gilts/bonds market, or are there other safe ~5% investment opportunities you would suggest people look into?

    Regarding Namo Tassa’s comment, I believe they were referring to your story about getting the contract in writing, and whether that should apply to transactions such as the money-back guarantee you provide on books.

    In my opinion it depends on the size of the transaction and the likelihood of needing to enforce the contract. So even if I didn’t believe Caleb would actually give the money back, for me I wouldn’t have been concerned because the cost is low and I doubted I would need a refund as the product is likely to be similar to the blog. But if someone is selling something like a $2k bootcamp weekend then that’s a different story, because it’s a high cost and you can’t be sure if the guy is actually going to provide the value he claims.

  5. I’ve seen this type of safe return mentioned elsewhere, but in my experience the returns are either much lower (e.g domestic savings account) or carry risk. These days is this bucket limited to the gilts/bonds market, or are there other safe ~5% investment opportunities you would suggest people look into?

    Whenever I make general statements like this, I always refer to portfolios, not individual investments. In terms of individual investments, yeah, you’re pretty much only looking at bonds or similar. If you diversify heavily (stocks, bonds, precious metals, cash, currencies, etc) you can pull off a 4-6% return that’s reasonably safe.

    Regarding Namo Tassa’s comment, I believe they were referring to your story about getting the contract in writing, and whether that should apply to transactions such as the money-back guarantee you provide on books.

    In my opinion it depends on the size of the transaction and the likelihood of needing to enforce the contract. So even if I didn’t believe Caleb would actually give the money back, for me I wouldn’t have been concerned because the cost is low and I doubted I would need a refund as the product is likely to be similar to the blog. But if someone is selling something like a $2k bootcamp weekend then that’s a different story, because it’s a high cost and you can’t be sure if the guy is actually going to provide the value he claims.

    Pretty much what you said, yeah. If you sell a widget for $50 and offer a money back guarantee on it, taking the time money to get signed contracts from each of your thousands of customers would be cost prohibitive.

    If, on the other hand, you were charging $75,000 for a corporate consulting contract and offering an unconditional money back guarantee for it (which would be very dangerous, since the results you provide for your clients can, and often are easily disrupted by things in the client company you can’t control) then yes, such a guarantee would be in the paperwork.

  6. Being rational takes courage! And you’re absolutely right about emotional control ruling everything.

    By the way, you can use the same asset for speculation or investment…it depends on 3 things: your intent/risk tolerance, your time frame (for how long are you willing to wait until that investment pays off) and the amount of your savings/net worth invested in that asset.

    I’m pretty sure you’re familiar with Nassim Taleb, Mark Spitznagel, tail hedging and Black Swans. You should always invest in insurances and bet AGAINST yourself – and the market – using those insurances. Things can go south anytime (specially when you’re putting money on a variable market) so saving a little on the side to bet on the other end of the tunnel is always worth it.

  7. You should always invest in insurances and bet AGAINST yourself – and the market – using those insurances.

    Yep. That’s what things like gold are all about.

  8. Although I don’t agree with your personal definition of what speculation is the advice is spot on and, honestly, should be considered common sense. I guess this is the kind of stuff that more often than not one learns by experience (read: losing money) and this is why it is not common sense, it is so simple it hides in plain sight.

    I believe speculation is not “earning more than X% anually” as you say, but rather it is a degree. All investments, as long as you don’t manufacture something in the process and just swap ownership when it’s convenient to earn money, are speculatory by definition. Of course there are more speculatory investments than others. You could get an idea of what I mean by watching at this quick sketch that shows what I mean here. I’d like to know your opinion on that.

    On the topic of trends and their predictability I follow Benajmin Graham’s advice on investing in something based on its intrinsic value, not in a long trend on a graphic that could be fueled by collective hysteria (emotions) or money supply manipulation (monetary bubbles).

  9. All investments, as long as you don’t manufacture something in the process and just swap ownership when it’s convenient to earn money, are speculatory by definition.

    Incorrect. You’d have a hard time convincing me that a money market account at Schwab or a five year US treasury bond (as just two examples) are speculatory.

    You could get an idea of what I mean by watching at this quick sketch that shows what I mean here. I’d like to know your opinion on that.

    That’s a sketch of buying and selling, i.e. trading. Trading vs. buy and hold is a completely different conversation than speculation vs investing. Obviously buy and hold is much safer than trading, almost 100% of the time (but not quite).

  10. Thanks for the article,

    Some comments: in investing/trading your goal should be to maximize expectancy which is:

    winning percentage*reward/risk ratio.

    when people brag about “never losing money” it means they are leaving money on the table on the R/R side of the equation and thus do not maximize their long term expectancy.

    So “never losing money” sounds awesome only to the uninitiated, but it’s not the whole story.

    Cheers

  11. when people brag about “never losing money” it means they are leaving money on the table on the R/R side of the equation and thus do not maximize their long term expectancy.

    1. Correct, but that still means they’re not losing any money.

    2. A lower consistent return is better than losing money.

    3. You can still have a “speculation bucket” where you can try to get higher than average returns; just make sure it’s not most of your wealth.

  12. I find this an enjoyable and insightfull read.

    Can you recomend a few resources for starting out in investing for us here who want to get a better grasp at these concepts?

    I’ve always had the habbit of puting money aside but never knew how and where to invest them, beside keping them in the bank, so learing about this could ensure the ground I plant my money on is more fertile so to say.

  13. Can you recomend a few resources for starting out in investing for us here who want to get a better grasp at these concepts?

    http://www.fool.com

    http://www.investopedia.com

    I’ve always had the habbit of puting money aside but never knew how and where to invest them, beside keping them in the bank, so learing about this could ensure the ground I plant my money on is more fertile so to say.

    Well, keeping a lot of cash is a good idea regardless. I certainly do (though not in a bank).

Leave a Reply

To leave a comment, enter your comment below. PLEASE make sure to read the commenting rules before commenting, since failure to follow these rules means your comment may be deleted. Also please do not use the username “Anonymous” or “Anon” or any variation thereof (makes things too confusing).

Off-topic comments are allowed, but Caleb will ignore those.

Caleb responds to comments in person, but he only does so on the two most current blog articles.

Related Posts

Begin typing your search term above and press enter to search.