Investing Vs. Speculating (And How To Do Both The Right Way…)
If you find yourself sitting on a little bit of cash in this market, then you might be feeling the urge to “invest” it somewhere. Either stocks, real estate, gold, or some other opportunity.
If that’s you, then first of all you should give yourself a pat on the back. Especially if that pile of cash came from harvesting some gains — or cutting losers short — when the market started turning south earlier this year. I’ve been saying for several months now that the pain in the market was likely to get worse before it gets better. And over at Capital Wealth Letter, we want to be ready to strike when the time is right.
The problem is that a lot of folks who want to invest often aren’t investing at all. They are speculating. As I’ll explain in a moment, there’s actually nothing wrong with this — in the right context.
So today, let’s take a moment to go through and explain the difference between speculating and investing. After all, failure to understand what you’re getting into could cost you dearly…
What “Investing” Should Look Like
Investing means finding an opportunity in a mispriced — or as I like to say “fairly” priced — asset. For instance, buying a piece of a business at less than its intrinsic value tends to lead to wonderful long-term returns.
To find opportunities like this, you generally must roll up your sleeves and do in-depth research to understand the company and its industry. You develop an investment thesis based on this deep understanding and analysis of the company.
This is the exact goal of what we do over at Capital Wealth Letter. We invest in wonderful businesses at fair prices and hold on to them for the long run… or until our investment thesis changes.
CME Group (Nasdaq: CME) is a great example. This is a wonderful business, which we originally bought in 2014. Since that original recommendation, our position is up by about 220% — compared to 133% for the S&P 500.
Now, to be clear, we’ve pulled some profits along the way in order to make room for other opportunities. So our adjusted return is slightly different than what you see in the chart above. But the point is that this investment has paid off handsomely for us since then — more than double the return of the S&P 500 over the same period.
CME operates and maintains exchanges for everything from stocks to options to commodities. And in return, it takes a cut of the action. When we bought back then, it was trading for an extremely reasonable price. Our annualized returns with CME have been about 15% per year. As a reminder, the broader market has historically provided annual returns of about 10% per year.
And if you think you missed the boat with this investment… you haven’t. Even after the recent pullback, I have little doubt that CME will continue to produce strong returns for us over the long run.
The Power Of Speculating (The Right Way And The Wrong Way)
Speculating is the opposite. It’s when you take a bigger risk and have no idea what something is worth. But nevertheless, you buy it anyway. The hope, of course, it that it’s the “next Amazon,” and you strike it rich overnight.
Now, there’s nothing wrong with speculating. I’ve made speculative recommendations in Capital Wealth Letter before. Some have paid off. Some haven’t. If fact, we have a section of our portfolio dedicated to such plays. And we’ve even dipped our toe into the cryptocurrency waters recently. (More on that in a moment…)
Many people will make a speculative investment, and when things go south, they tell themselves it’s an investment. They watch it swell into a massive black eye in their portfolio. They won’t sell it, as now they are “buy and hold” investors, and in it for the long haul.
This is where the real problem is with speculating. It’s better to cut your losses and put that remaining money to work elsewhere.
I typically try to avoid speculating. But make no mistake, when I do make a riskier investment, I know it’s speculation and not an investment. I also only dedicate a smaller portion of my portfolio to those speculative plays. And if it turns south, I take my lumps and move on.
What’s key in all this is understanding that human beings are hardwired to be irrational when it comes to money. That includes you and me. Emotions take over and we take unnecessary risks, make silly purchases, and kick ourselves after losing it all.
Let’s be honest… speculating is pretty damn fun. It’s exhilarating. It catches our imaginations. We dream big thinking about what it will be like when we strike it rich with some penny stock or other wild investment. It’s this very irrational behavior that will continue to create bubbles that will eventually pop and wipe people out. It’s been happening since before the Dutch tulip mania of the 17th century. More recently we had the dot-com bubble and the U.S. housing bubble.
But if executed properly, it can supercharge a portfolio like nothing else.
That’s why I always warn readers to not bet the farm on speculative picks. Our track record has been pretty solid over the years, but nobody gets everything right. So if you’re looking to put some money to work in picks that have hyper-growth potential, then make sure you know what you’re getting into. Don’t bet any more than you can afford to lose, and spread your bets around to increase your chances of success.
P.S. If you were skeptical about cryptocurrencies and feel like you missed the boat, listen up…
First of all, I get it. Years ago, I was skeptical about Bitcoin, too. But after years of intense studying (and trading), I’m a believer now. And if you’re looking for a “second chance” to get in on crypto, you’re about to get it.
As I explain in my latest report, we now have a short window of time before crypto transforms our financial system. And I’ve identified three coins that are set to unleash a new wave of wealth as crypto goes mainstream. Go here now for all the details.