Having been actively trading and teaching in the markets since 1999, I have come to the conclusion there really is not a great deal of difference between investing and speculating. The difference between the two is the assumed risk and the view going into an investment versus going into a speculative investment.
The first thing I teach all new investors, and those who elect to take my course, is this: “THE ONLY GUARANTEE IN THE MARKETS IS THE FACT THERE IS NO GUARANTEE”.
Investors have learned this lesson the hard way with Nortel, Enron for example, showing investors that supposedly rock steady companies are no more able to deliver a guaranteed return than a speculative investment. Both companies on the surface had impeccable credentials. Both were seen to be in growth industries (telecom and energy) and both were widely held not only by retail investors but by venerable institutions who after all have a staff of professionals to ensure their firms money is being safely invested. As it turns out the fundamentals investors were relying on were fabricated and billions of dollars were lost forever.
Speculators go into an investment knowing they can easily lose most if not all their money but the promise of reward is simply too great to pass up. Once the ball begins rolling many investors begin piling money into certain sectors or companies in the hot sector in the hopes of seeing a substantial return. They say there are two overwhelming emotions driving the stock market-fear and greed. I say there is only one, and that is fear. Fear of missing the next big thing and Fear of selling a losing position because they know as soon as they do the price will rise. This of course does happen but for very different reasons which I can discuss at another time.
Two sectors which I cover have seen this aspect of speculation come into play; oil and gas stocks and uranium stocks. If you care to look at the correlation between the two it is quite easy to grasp. As the price of oil increases, and reaching levels which are inflationary, investors feel an alternative source of energy is needed and the choice of the moment is nuclear energy. As a result uranium producers or uranium exploration companies began to be the recipient of money flowing into their stock. As the price of oil climbed higher so to did the uranium sector. When oil falls as it has been doing, then uranium companies share prices fall for two reasons-those who were in early are taking profits and the selling increases as the price of oil drops.
Even the run up in oil was speculation versus investment and by this I mean is the fact there were retail investors playing the oil futures game who had no idea what they were doing. I have been a bear on oil since last September. My long term target for oil based on my research published elsewhere on October 10 when oil was trading above $62.00USD per bbl was $54.14 which was hit in yesterdays session with the low actually being $53.88 before recovering and it now trading at $55.55 as I write this. The volume which took oil prices higher last summer was far too light to sustain those higher prices especially at a time when demand was decreasing. We have gone from Peak Oil to where did all this oil come from!
Because of the calls for $100.00 per bbl oil, many felt investing at $60 to $80 was a sure bet but those who control the markets allowed the price escalation to rise for one simple reason. It is a far better thing to short from a high over-extended price than a low one. Uranium yellow cake is expected to hit $125.00 a pound in 2007 thus leading the charge into uranium stocks.
So as you can see, there is very little difference between investing and speculating and quite frankly most retail investors spend more time planning their vacations than they do planning their investments.
So in closing you should remember a number of things.
1) The only guarantee is the fact there is no guarantee. By law brokers are forbidden to tell their clients they cannot lose money on said investment.
2) The root word of broker is broke so sometimes the advice you give yourself can be better and far cheaper.
3) Averaging down on a losing investment is like making love for chastity. You have to be disciplined, you have to be knowledgeable and you have to be ready to sometimes take a loss. See rule #1.
Looking forward to your feedback. Remember, the amateurs open the markets, the pro’s close them.