Saturday, September 13, 2008

Speculation - OK In Small Doses!

Speculation is fun and dangerous. I guess it is fun because it is dangerous. The throw of the dice, a bet on the future, the possibility of a big payout - it is a rush. The multi-billion dollar gambling industry is a testament to this basic human weakness.

So the question is - does speculation have a place in your financial plan? My answer is yes but in small doses. As a matter of fact - very small doses.


Small Doses - that are enough to vet your appetite but not significantly impact your investment portfolio. Bottom line - be ready to lose the money when you put on speculative bets.

Educated Betting - If you are just rolling the dice and hoping for the best - might as well lose your money in Vegas. Speculative investing involves betting on an outcome due to an advantage you have. If you bet that the US market will keep vacillating for the next six months - it is an educated guess with a high degree to success. If you bet on the future of Lehman Brothers - your chances are 50/50!

Fun - I guess for me speculative investing keeps me interested in the market. I lose some money, make some money but keep engaged in the market gyrations. Majority of my investing is on autopilot but the speculative component is what keeps it fun & interesting.

When speculation turns to gambling, financial issues will start to manifest themselves. The example on the right emphasizes this risk very well...

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1 comment:

Bill D. said...

It is also called a "calculated risk" and it works because if you lose - you lose small but if you win - you win big.

Case in point - Bill Gross of PIMCO who just made a killing on the bonds in Fannie & Freddie after the gov took them over.

Good post!