I’m often asked how to get started as a speculator. I have to start by pointing out that it’s one thing to be an experienced investor looking to profit from more speculative investments, and quite another to start from scratch. The two starting points are quite different, and pose different challenges.
The seasoned investor may need to “unlearn” some things—or at the very least learn to look at many things differently. It is not simply a matter of taking on more risk. If you are already an investor, I’ve written a “how to” report for adapting your activity to successful speculation: Speculation 101.
If you are starting from scratch, here are some points for you to consider first:
1. You Need Start-Up Capital—at least $10,000
Someone once asked me how to speculate with $1,000. I said they should go make $9,000 more and then start. I don’t mean to rain on anyone’s parade, but it’s bad strategy to put all your money into one or two speculations and hope to get lucky right away. But dividing $1,000 up among a bunch of tiny positions means that even big wins on one or two won’t make much difference.
This does not mean you have to be a millionaire to speculate. But even people who work for minimum wage can save up for a new car, a vacation, or a wedding. Apply the same discipline to saving up for speculation, and you’ll have enough to start out on a sound strategic basis.
Imagine an entry-level worker who spends $10,000 on a dream vacation with their family. If all goes well, they have fun and have happy memories to enjoy for a lifetime. Nothing wrong with that.
Now imagine the same person deciding to spend $10,000 speculating. Win or lose, that person gets an education that will benefit them for a lifetime. And if they succeed, they’ll make enough money to improve their life dramatically.
This is worth doing right.
2. Speculate Only with Money You Can Afford to Lose
Successful speculation requires discipline. That’s hard to maintain if one is panicking about losing money. James Bond may be able to calmly play poker with arch-villains while the fate of the world hangs in the balance, but most of us lack that sangfroid. Fear is the enemy of rational decision-making. And the best way to keep fear away is to speculate only with money you can afford to lose.
Consider our two imaginary examples above. If a person spends $10,000 on a vacation, the money would be gone after the vacation.
If the same person decides to spend $10,000 educating themselves about speculation, any result other than a total loss counts as a win.
Suppose all $10,000 was lost. It would be a painful lesson, but a powerful one, and—I would argue—a valuable one. In practice, this is rare. Even random picks should include some winners. But even if the whole basket of speculations was to drop dramatically, one would take one’s losses, rebuild and redeploy. The education from such a harsh lesson should enable the student to do better on the next round.
The key point is that if one categorizes money deployed in speculative investments as already spent, it’s easier to deal with the ups and downs that follow more calmly. Since any outcome other than total loss is an improvement, one can act in a context of “nothing bad can happen here.”
If, on the other hand, one speculates with money needed to pay the rent, or needed for anything at all, one is setting one’s self up for stress, panic, and poorer performance.
Don’t try to be James Bond. He’s not real. Play only the games you can afford to play calmly.
3. Don’t Be Lazy
If you’re starting out, you should think of yourself as a student. You’ll want to read all you can on the subject. You’ll want to apply what you learn to analyzing investment opportunities. You’ll want to develop specialties in areas that interest you.
All of this takes work.
Yep. Get used to it.
If you want to make millions without working, go buy lottery tickets.
Rational speculation is not just gambling. It offers much better odds of success, but you have to work at it. If you’re not willing to do that, why should you expect to make any money?
Accept that speculation is serious business, deserving of your best efforts—or stay home.
4. Don’t Be Greedy
The biggest mistake newbies make is letting greed make all their decisions. In their extremes, fear and greed are just as bad for making rational choices.
But what do I mean—isn’t making money the whole point of speculation, and isn’t that greedy?
Yes and no.
Of course we’re here to make money. But the famous Gordon Gekko quote about greed being good was about self-interest in the marketplace. It’s not about an overpowering emotion, a shortsighted obsession that makes it difficult to see the facts and weigh the odds.
Whether you’re up or down, you always want to weigh the odds as accurately as you can.
As a specific example of this general principle—a common mistake many speculators make—is letting greed prevent them from taking profits. When they make the right call, and something that was undervalued goes screaming up to being fully valued, or overvalued, it’s no longer the same speculation. Many people want to leave all of their money in—or even put more money into—such a speculation because it’s a winner. But that’s greed getting in the way of seeing that the odds have changed.
Greed is the #1 cause of terrific wins slipping through one’s fingers.
5. Accept Help
With the above points in mind, I do suggest reading my Speculation 101 report for more specifics.
Of course, I’d love it if everyone who reads this would hire me to be their consultant by subscribing to The Independent Speculator.
That said, I don’t know everything, and there are other teachers out there. For instance, Brent Cook and Adrian Day are both very experienced and straight shooters among newsletter-writers. My old mentor, Doug Casey, is back in the saddle at InternationalMan.com. And of course, Rick Rule at Sprott Global was one of the best teachers I ever had.
The point is to remember that you are a student. Don’t waste time reinventing the wheel. Learn from those who’ve gone before you. Seeing our mistakes can help you avoid making them yourself. Adopting our best practices can help you get to where you want to be, financially, faster.
Pay the tuition. Accept the help. It’s worth it.
Wednesday, October 10, 4:57pm, EDT, 2018