What Most People Fail To Understand About Speculation Vs. Investing…
If someone has a little extra cash laying around, most want to “invest” it somewhere. Either stocks, real estate, gold, or some other opportunity.
The problem is that these very folks who want to invest often aren’t investing at all. They are speculating.
How “Investing” Should Look
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 my premium newsletter, Top Stock Advisor. 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, shares are up more than 260% (I pulled some profits along the way so our adjusted return is slightly different):
As you can see, this investment has paid off handsomely for us since then. More than double the return that the S&P 500 has offered over the same period. Our annualized returns with CME have been about 36% 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.
The Power (And Pitfalls) Of Speculating
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 Top Stock Advisor. Some have paid off. Some haven’t. And we have a section of our portfolio — Game Changers — dedicated to such plays.
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 take a riskier investment, I know it’s a speculative play 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 (buyer’s remorse anyone?), and kick ourselves after losing it all.
But 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 release a list of investment predictions every year that are full of well-researched, calculated, guestimates about what the future could look like — and how you can profit…
Now, as I tell my readers when I release this list each year, I wouldn’t bet the farm on these picks. Our track record has been pretty solid over the years, allowing investors the chance to rake in gains of 622%, 823%, and even 993%. But nobody gets everything right. So if you’re looking to put some money to work in picks that have hyper-growth potential, then this is where you should start.
Many of our 2021 predictions (about everything from cryptocurrency to lumber prices) are already coming true. But there’s still time to get in…