Speculation mixed into your overarching investment strategy is okay, as long as you understand
that is what you’re doing.
As it turns out, most people are speculating when they think they’re investing…
If you don’t understand the difference… it could get you into trouble.
A precise explanation of that difference, coming up...
It’s good to see you again.
I appreciate you being here.
This understanding—the important distinction between investing and speculation—will help
you continue building your rapidly-growing, highly-diversified net worth.
Which, one video at a time, is what I’m all about here on this channel.
In our last video, I mentioned the four ways to describe the act of you putting your money
into an individual stock: investing, trading, speculating, and gambling.
In that video, we covered the first two in detail.
They are the most common among wealthy individuals.
So you should definitely check that one out as well—pause here and open it in a new
tab or make a mental note to watch it after.
After investing and/or trading, speculation, too, can have a place in a sound investment
strategy.
I recommend it only come into play (at least to any significant degree) after you’ve
done most everything else within your overarching investment strategy.
Helping you craft and optimize your own investment strategy is important to me, we’ll absolutely
be exploring all the necessary aspects of that process on this channel, so if that’s
important to you, and you haven’t already, consider subscribing and clicking that notification
bell, so that we can do that together.
Investing and trading may be the most common of the four among the wealthy, but among average
investors—unbeknownst to them—speculation is much more prominent.
It comes into play when you may not have a fundamental or technical reason to support
why you think something's going to move, but you think there is a chance for a dramatic
move and you want to capitalize on it if it happens.
It might be in a new technology that you've discovered that nobody really knows about
and it hasn’t been tried or proven, but you think that it's future is so promising
that as soon as people start to recognize it, the price of shares in the company producing
that technology is going to skyrocket.
So you're going to take advantage of that, by buying shares (or just “going long”
in some way).
If that is your only reason for taking a position, that would be speculation.
This is what a lot of people do.
They don’t realize they’re speculating.
They don’t realize there’s a formal analytical process to research this out and make an educated
decision.
It happens all the time.
A good sign you’re speculating is if you’ve never looked at the company’s financials,
or you have no basis for any assessment of a fair value.
For example, your friend calls you with a hot stock tip.
It’s this small company make an amazing new product that’s going to change the world—it’s
the next Google, the next Amazon, and here’s your opportunity to get in on the ground level.
You dig deeper, reading several articles that back up what your friend is saying.
This is going to be a big deal.
So you “invest.”
Well, in this case, you’d actually be speculating.
You may have read some articles and researched the new product.
You could know it inside and out, but if you’ve never analyzed the company from a financial
perspective… you’re speculating.
You can’t know how it’s current value compares to what you think might be fair;
you’re just banking on some exponential growth.
Do you have a friend (or friends) like this?
Well, maybe the next time they share a hot tip with you, you can return the favor by
sharing this video with them.
Actually, why not just get ahead of it and help everyone out, by just sharing this video
with all your friends and family, so they too can understand the important difference.
Well, here’s another (more heated) example: I see this a lot when people ask me about
Bitcoin. ...and they ask me about Bitcoin all the time.
You may have some amazing reasons and logical arguments for why you believe its value will
continue to go up.
But what is lacking is any reasonable basis for an assessment of fair value.
Now, I know I’ve probably opened a Pandora’s Box here (I will absolutely be creating a
video in the near future to deep dive into all the reasons I don’t own Bitcoin), but
that deep dive is a topic for another time.
Bitcoin just happens to be the most relevant example of people speculating en masse without
realizing it.
With these scenarios, as is often the case with speculation in general, there is a risk
of losing everything.
If you’re wrong, and this technology or this hot new stock or this particular cryptocurrency,
never actually takes off, those companies could just be left with a mountain of debt
and no assets to show for it… they could easily go bankrupt, leaving you with a 100%
loss.
And the value of the cryptocurrency, also, of course, having no assets tied to it,
could drop to nothing...
But if it had taken off as you expected… you could have made multiples, maybe 1,000
or 10,000%!
That’s why people do it—that very real potential for obscene gains.
But that’s also why I recommend it come (if at all) later in your investment strategy—that
very real potential for total loss.
You should realize: successful speculators lose most of their speculative bets.
So speculation is not for the faint of heart.
But, if you’re doing it right (you’re doing
it carefully),
as long as some of those bets play out, because they can have such spectacular returns, it
could still be worth it.
Investing, trading, and speculating can all have a place in building your net worth.
When you gamble, on the other hand, you have no basis for why you even think the price
might go up… your decision is based more on hope, on chance, maybe even on the thrilling
roll of the dice.
Remember that friend from earlier?
Well, he’s back.
you should really find better friends And this time he’s pitching you on an awesome
penny stock opportunity.
“It’s trading at 1 cent per share right now.
Think about the returns if it jumps to a dollar!
And if it doesn’t, if nothing happens… it’s just a cent, what d’you have to lose?”
Young aspiring traders, make this mistake all the time.
I’ve actually asked you all before about “investment” mistakes you’ve made and
this was by far the most common.
If you don’t have an understanding of the fundamentals (a must for a trader) and you
don’t even have a thesis for why the stock might pop (to at least make it a speculation),
then you are just gambling, you’re rolling the dice and hoping for a big win.
How about one more example?
And I fear (with this one) I’m only adding fuel to the fire that’s already raging within
my Bitcoin-enthusiast viewers, but honestly, the more I think about it, more BTC holders
are actually probably gambling than speculating.
If you don’t even know (or fully understand) the reasons you think it might go up—you’ve
just seen that it has gone up by X-thousand percent and want to be a part of that rise
if it continues… then, I’m sorry, but, that’s gambling.
And gambling has no place in investing.
I'm not saying that you can't gamble for fun and on a budget, but it's not an investment
strategy.
If you enjoy the thrill that can come with gambling, then, by all means, include it in
your monthly entertainment expenses.
So those are the four broad categories.
As you add assets to your portfolio, as you make an investment—whether it's real estate,
stock, your own business—consider whether it's an investment, a trade, a speculation,
...or a gamble.
Understanding that will help you develop your overarching investment strategy.
Which way do you lean?
Do you prefer the relative predictability of investing or do you like to speculate on
the next big thing?
Let me know in the comments.
If you found this video helpful, let me know by leaving a like and sharing it with other
people who you think might benefit.
And if this is your first time here, don't forget to subscribe and click that notification
bell so that you can continue on this path that you just started to building your rapidly-growing,
highly-diversified net worth.
Thank you so much for spending time with me here today.
I really do appreciate it, and I can't wait to see you in the next one.
Take care.