Tuesday, January 9, 2018

How I deal with speculative investments

A comment from Michael triggered this little blog post. I don’t like cannabis stocks, they are very fashionable, and I tend to be a bit argumentative and contrarian. Some call me stubborn but I tend to change my views if data says so. If you watch BNN or listen to Trudeau you’d think the main issue in Canada’s economy is cannabis and becoming a world leader in cannabis production. But in reality, cannabis will maybe contribute 5 or 6 billion per year to our economy. Heck that is the value of one medium sized oil company in Alberta. Canada’s economy generates nearly $2 trillion per year.

In my home country, cannabis can be legally consumed as long as I can remember – somewhere in the fogs of the 1980s. But if you’d read the Canadian press you’d think we are true revolutionaries. Many U.S. states are legalizing or have also legalized many aspects of marijuana; so what’s the big deal?  Canada is ‘soooo progressive’ that not even euthanasia is legalized. People go to prison for assisting in euthanasia. Again, in my home country this is legal for years and I have two relatives who choose for dying in dignity.   Sorry, but Canada is not a world leader in forward thinking. Having a liquor board with province owned stores is another example of Canada’s forward thinking.

Don’t get me wrong. In many ways I love living in Canada except when dealing with hot-air hot-button driven liberal and NDP governments who think they are ahead of the rest of the world. The cannabis phenomenon is a perfect example of these ‘inflated frog’ policies and investing in cannabis producers is part of the fashion. So, yes, it is highly speculative and there haven’t been a lot of corporate profits. It is certainly not a buy and hold investment type. Having blown off all this frustration with Canada’s current political climate, I want to say two more things before moving to the topic of speculative investing. 

One: Canada is a country where these days, people are more driven by ideology than pragmatism. Canadians seem to prefer destroying their economy for the idea-du-jour. Examples are many like voting against Meech Lake and the Charlotte Ville agreements in the 1990s which might have prevented a lot of separatist talk and Quebec’s self destructive economic policies. Really, we bash Quebec for having separatist ideas but when we had the chance, we rejected said agreements in referendums and because of local provincial politics (not Quebec’s). Another example is Canada’s pipeline debacle. This is driven more by interprovincial pettiness and U.S. interference into our country than anything else. We Canadians prefer to slice a piece off our own nose rather than that we as a country or as an individual province may prosper.

Two: Canada is extremely divided in many aspects and I for one pray that with our dysfunctional governments we may never move towards a proportional election scheme because then the interests of smaller populations in provinces such as Saskatchewan or Newfoundland and Alberta would be wiped out by the population giants of Ontario and Quebec.  Having said that lets move to the real topic of this blog post: speculative investing

In my books speculative investing is investing not based on value but based on an event that may trigger profit. Speculation is betting, and it is often irrational and extremely risky. Bitcoin is speculative in my opinion. It depends on the event that the world would consider it a true new currency and that it will be used at least as widespread as any other currency such as fiat currencies or gold and silver. Investing in cannabis is also a speculation on the successful implementation of a fashionable ideology. If we ever legalize euthanasia, are we suddenly going to invest in palliative care companies? 

The secret of speculative investing is that it is often momentum driven and it is therefor often suitable for investing techniques such as technical analysis to provide insight in the speculation’s momentum trend and its continuation. So, I would look at the charts to try figuring out whether it may be time to sell. A second consideration is risk management. Don’t let your speculative investment become so big that it can really damage your portfolio. You may make many 100s percentage points of profit, but one 100% decline wipes it out in one blow. If you’d use leverage, a failed speculation may put you in bankruptcy. Never use leverage in an speculative investment! If there is risk always consider the use of stop-losses and adhere to it rigorously.

Never use more than a tiny fraction (less than ½% of your portfolio) for your speculation and allocate with great caution. In my case, I speculate in bitcoin with tiny amounts (as of today I own $250 worth of bitcoin and I bought a $250 hardware bitcoin wallet.  I may expand to $1000 worth of bitcoin). But I really bought to learn about the blockchain system not to make enormous profits. Still if my bitcoin speculation doubles, I will sell half which equals my original investment and then I can play with the rest without ever losing a penny of my original investment capital.

At one point in time, I owned a fairly large amount of employee stock options. It was in a bull market and the value of the options kept going up and up. It became large enough that I started worrying about it to the point that I didn’t always slept well. That is a point when you scale back the speculative investment to a level that does not affect your sleep. As the saying goes in the stock markets: Don’t by greedy as pigs get slaughtered. I hope that this helps all of you speculators to protect your investment portfolio from excessive damage. It is better to have one bird in the hand than ten in the air. Especially since birds tend to fly away!

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