Managing speculation risks, returns and failures are wealth building skills used to seek high returns in speculative plays with risks including possible failures or total capital loss.
Do high risks equal high returns?
Money Choices That Grow Wealth course 250, Lesson 5, answers the question, do high risks equal high returns? At the end of the lesson, links to related content help you learn more.
What you learn:
Managing risks, returns and failure are important investing skills of superior investors that you can learn. Skillful investors work in increase returns while decreasing risks. They know risks and returns are related but not directly connected and each can be separately managed.
Choosing speculative trading choice
We will first discuss speculation as a choice and the risks as well as the returns from this aggressive approach to stock markets. Then we take a look at possible failure and the lessons to be learned when failures happen.
A lesson covering speculation strategies is a good place to consider how superior investors think about risk management. Of the 3 basic stock market approaches, investing, trading and speculation, in general, the highest risks fall to speculations. While speculation risks can be higher, the huge possible returns from a speculation are their great attraction.
Speculation is a choice. There is no requirement to buy any speculative stock or consider it part of a normal or typical investing portfolio. Speculation are a specialty part of stock market investing. It is not the place to begin learning about investing. First learn the basics and gain experience by successfully building an investing portfolio before you consider any speculative investment.
Playing speculations has risks of failure
By looking at examples of investing failures we learn the high costs of losing speculations. Speculation failures improve investing by helping you avoid the expensive experience of making poor speculation decisions. Knowing speculation risks and when to give them a pass keeps your money in your pocket. Better yet is to keep earning returns from producing investments.
The attraction of speculation is clear – those huge possible payoffs! Investors can speculate on any company from a concept, a tiny startup of the largest enterprise. The risks and potential gains are most extreme among the junior and startup companies.
Although risks can complicate those spectacular returns, pursuing fast money plays can be exciting! In contrast, income portfolios offer boring, safe returns! Still, when comparing the results of long-term wealth building, investing beats speculations over time, every time! High risks do not always produce high returns and can produce total loss!
Speculation failures improve investing by changing our thinking and behavior for the better. That changes bad stock market experiences into valuable lessons using investment failures to improve markets and our results. That helps us to develop the thinking and behavior of superior investors.
Speculations are not income earners
Speculations are not income earning investments. They may prove to be great trades or very high risk gambles but they have limited or as yet no ability to produce income. As such they are not investments. Investments must pay a little or a lot, but they always pay or we remove them from our list of investments.
While speculations do not pay, they offer the possibility of a much higher returns, much faster, than investments. But speculations have higher risks than investments. Those risks can be modest or extreme. Better speculators develop good risk assessment and management skills.
Highest risk speculations have the possibility of a total investment loss. That potential loss is not necessarily offset by a high potential reward. Beginning investors should be aware that extreme risks mean there is a very real possibility of total investment loss. No beginner should consider or have anything to do with any speculative investing play.
A key point to learn is that increased risk does not directly tie to higher reward. Risk and reward are associated but do not directly offset one another. Media give disproportionate amounts of attention to trading and speculating. That noise can mislead new investors. Investors must develop the ability to filter media noise.
Speculation falls at the most extreme end of all high risk strategies. This is as close as investing can get to gambling. In fact, in legitimate casinos, the gaming odds can be considerably better than among the more extreme speculative plays.
Year in and out, the junior mineral explorers are the largest speculative stock group in Canada while in the U.S. the Over The Counter (OTC) Market hold the dominate number of speculative plays. In the, Oh Canada and our one place to trade post, the Canadian markets including the TSX Venture Exchange were discussed. In the, Sorting through the other American markets post, we discussed the OTC Market.
Like in other human enterprises, there are both legitimate and shady undertakings in the investing world. A disproportional amount of both manipulation and outright fraud occurs among speculative stocks.
Still, there are also legitimate and real emerging companies, excellent discoveries and and huge investment winners! Enough big winning plays happen to keep investors coming back hoping to catch the next big one!
Should you be tempted, before you get anywhere near this high risk jungle, get help. Have an experienced, knowledgeable and honest guide. Better yet, in my opinion, your financial security will be best served by simply staying completely away.
Common speculative approaches:
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Trading on steroids
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Rip Van Winkle trades
Covering these speculative trades are extensions of our trading discussion. We first discussed, Trading: an aggressive play and then momentum investing as methods of seeking bigger gains, faster. Now with speculating we look at the most aggressive and risky approach to trading.
Trading on steroids
Trading on steroids essentially means buying stock as it rockets up to ever higher prices on exploding volume. These are buying frenzies of raw greed. The ride can be exhilarating at the risk of a deal that may blow up or vaporize along with your money.
This approach waits for the wild run to start before investing. Not being in at the bottom means missing the biggest gains. However it also ensures not being stuck with a dead investment that never moves.
Like any trading, the most important skill remains getting out while there are still buyers willing to pay a higher price. Most especially junior exploration speculations frequently come to a rapid and losing end once the buying frenzy passes.
Rip Van Winkle trades
Rip Van Winkle trades involve buying many junior speculations and waiting for them to move. Speculators using this approach sit on investments in many dormant penny stocks. They hope for a good one or few among those they picked. At times those few can handsomely pay off making their wait and long odds worthwhile.
When such sleeping stocks do wake up the returns can run to multiple hundreds of percent! Those are the happy stories; most go nowhere fast and are simply dead money. Even the majority that do move quickly flame out but a few do go from pennies to dollars.
In extreme bull markets riding speculative stocks can produce phenomenal gains but always at very phenomenal risk. Prices move on news, rumor or simply lies. News or rumor of a discovery, major business, political or environmental event can trigger huge price movements.
Pennies to dollars
Buying a position in the stock of an affected company before such news can turn pennies into dollars. Once the story breaks the action gets fast and furious. This strategy can profitably work for those with knowledge that have done their homework and can pay close attention to the market. Have I mentioned: this is not ever a strategy recommended for beginners?
In Canadian junior resource penny stocks there are a myriad of other ways to play the speculation game. This can work for an experienced investor that makes the effort. However, it takes considerable time, effort and knowledge to learn. Beginners stay away. You need an escort here.
Speculators accept big risks pursuing fast spectacular returns
Most investors avoid speculations and the associated risks. However, awareness of speculations and risks help you understand this aspect of stock market investing. Awareness of the risks helps you decide if, when and how you may speculate on the opportunity to seize a huge gain. By better understanding the risks of this aggressive strategy, you can decide when it may work and when to avoid speculation.
Speculation complications trade risks for spectacular returns exposes our portfolios to high risks. The complications come because there is plenty you have to know including the potential of huge losses.
How complicated? To profit from speculation you need the market as well as the specific stock and the timing to be right. Markets have seasons and patterns. Local, regional and global events can have significant impact. For example, over time resource industries fall in and out of favor.
However, there is another rub! Even when speculation delivers a great return, you are sitting on cash at the end of the play. You had to sell to take your profit so you must find another speculation to keep the returns coming. Doing that with consistency is a huge challenge.
Speculating or an accidental investor?
Miss any of the above points on speculating and you could become an ‘accidental investor’. That is a speculator who missed the last bus and can’t sell at a profit. Too many then say they are investing. Their special situation is that they are poorer. Some get wiser, others not so much.
That’s a dud. When a speculation turns out to be a dud, experienced players take their loss and move on. They get back what capital they can. That allows them to move on and play another day. Don’t hide behind the thought that speculating for big returns gets complicated. When you realize you have a dud, get out!
No anti-speculation ranting!
The inconsistency of speculative returns is where the steady returns of an investing strategy pass the overall performance of a speculation strategy. This is not a blanket condemnation of speculation, I have enjoyed stunning returns on speculations! You can too. However, you have to know what you are doing, the returns are not steady, dependable or always available. That is why investing produces far better returns over time.
Beginners can luck out. But an active and engaged teaching mentor is the best way to learn. It is no place for a beginner to be alone. Even superior investors with no interest in speculation, recognize speculations. They know the differences between speculation, trading and investing.
Know that speculating well:
1. takes considerable knowledge
2. takes time and effort to learn
3. only speculate with high risk capital
The market direction must be favorable and established. The industry must be in favor. Finally the specific stock selected must be among the winners. All that against long odds.
Knowing the players behind a venture can significantly change the odds in your favor. Particularly in the resource sector that knowledge of their history can help you judge if you should be there.
Specialty or resource speculators:
1. have resource or specialty knowledge
2. know the resource or specialty market
3. know both the relevant infrastructure
Canada offers the leading market to fund new and emerging resource companies. Canada has thousands of knowledgeable market players willing to consider financing such ventures. Still they only come in when the stars line up. Right now for mineral producers and resource startups, the circumstances are grim.
Oil and natural gas
You should also be aware that resource speculations go through long periods of chill. Don’t try to play a market that does not exist. When resource markets are suffering a winter chill, don’t go near them.
More recently, cryptocurrency and marijuana have ridden spectacular speculative waves. Electronic vehicles and emerging technology including AI (artificial intelligence) listings have also moved far above any justifiable price level. That introduces a last point, don’t ride speculations down as they can come back to Earth very fast!
Speculation opportunities abound
Speculation opportunities are everywhere. Speculators act when opportunity knocks. Many companies outside of the resource sector offer speculative opportunities. In fact in all markets there are speculative opportunities. The basic approach for all speculations remains the same. Yum yum when you get it right! Ouch! When wrong. Losing speculations can mean total loss.
Losing speculations can be a total loss
But a losing speculation can be less than a total loss. Frequently bailing early with a small loss is best as it preserves capital. But if you get it wrong all your capital could get toasted, 100% kaput, smoked, gone. Only play if you can accept and cope with the financial, emotional and psychological pressure and consequences without damaging your personal circumstances.
For now this very light scratch of the speculative surface will be sufficient. A legitimate but high risk approach to the market, speculation can produce spectacular returns under favorable circumstances. But the market has to be there; we can’t push for speculation opportunities.
Speculation opportunities happen again and again. There is no absolute formula as next time will always be somewhat different. Anyone interested has to wait until the speculation opportunities unfold, then act. For example, as this lesson is being updated, cryptocurrency and marijuana related listings have provided a wide array of speculation opportunities.
When speculations go wrong
Losing speculations cost real money! The example of a speculation failure can be an example of any investing miss. In any case the bottom line and your pride can take a hit when a failed investment or speculation crashes and turns capital into smoke. Speculating losers can deliver lessons including fast failure, courts kill money, never average down, sell losers, and avoid psychology games and litigation.
6 Lessons from speculation losers:
- Speculations fail fast and often completely!
- Courts are expensive places that kill money-dead!
- Never average down!
- Sell a speculative loss and get the money to work!
- Psych games cost and are never good investments.
- Litigation is high risk gamble.
Dad taught me lessons in life!
A very long time ago, when I was a boy, a running family joke developed about my Dad’s misadventures. Dad was a creative guy, receptive to new ideas, approaches and always willing to experiment. At times some projects went spectacularly off the rails!
On such occasions, when something did not go as well as hoped, he would look at me and say, “let that be a lesson to you!” It was as if the latest disaster was arranged specifically to teach me another life lesson! I learned to, “be careful around this man”!
Passing on Dad’s lesson
After a speculation blowup turned money into smoke, I felt like my Dad must have felt on some of those occasions. So to pull some good from my disaster, I hope, this can be a lesson to you!
Once, one of my speculative technology flyers, lost a major court case. Although management was confident the case was theirs to win, they didn’t! The jury said no! In the minutes after the announcement almost 30% of the stock value evaporated! Hard to think speculation failures improve investing when my 50% upside was gone in a blink!
Speculations fail fast
When speculations don’t work, consequences are quick and costly. Losing in court also made the stock a loser. When you have a loser, it is best to take the hit, accept the loss, and move on.
Most often, when you are on the wrong side of a deal, taking that first loss is the best loss. It is the cheapest lost because most often the stock falls further. Sell to avoid the continuing decline, clean-up and aftermath.
The technology sector has dozens of companies with shareholders still “holding on” as they wait for the big inevitable come back. That money is dead. The facts are, most of the time, the comeback does not happen for the shareholders at the time of bad news.
Speculation failures improve investing so get out what you can and get that money to work earning you returns.
In the case of technology company setbacks, the technology may very well survive. But frequently refinancing or restructuring separates or diminishes early investors from the later opportunity.
In such cases, sticking around only delivers more loss. Existing shareholder investments can get effectively wiped out. So the company and technology survive but the shareholders get financially hollowed out. Most do not come close to making back the loss let alone delivering any gain.
Even when there is no risk of going out of business, the market reaction can be overdone and usually punishes the stock. Shareholder opinions and even the facts may not matter much in such cases. You lose. The company could very well come back and develop financial strength. But, making that bet runs the risks even higher. Experience says, move on, do not let possibilities give you false hope. Get the money to work in producing investments.
Courts kill money
Lost court cases turn funds invested into dead money. The speculative bet was wrong so salvage any money you can by selling. Bring the money back to life; put it into a positive producing investment situation. Don’t speculate on a court case. Courts can produce nutty or bad for business decisions.
Never average down
That is never, NEVER average down by buying more at lower prices on the theory that your average cost gets you closer to break even. The average down theory says that a much smaller recovery gets your money back.
Even when that approach works, you neutralize even more money than the initial investment in the speculation. That is putting good money after bad. Stocks take time to recover. Averaging down means you have even more under-performing capital tied up for a long time. Combined, these factors harm your overall portfolio performance.
When your speculation goes down, admit you were wrong. Sell out and get what you recover back to working for you. When you lose, better to sell out. Stop the pain. Most importantly, get that money working for you in a performing investment. The net result will be better returns.
Sell a speculative loss
If or when you speculate and have a failed speculation, sell to improve your investing. When a speculation or trading position does not work as you wanted, sell. Face facts; the speculation did not work. The only response is to sell. Get out of a loser. Recover the capital you can and move on by putting the remaining money to work in a positive position. Your speculation lottery ticket didn’t win. Accept it. Move on and make money.
Psych games lose money
Playing a psychological game with yourself in the market is very costly. Do not go through any mental gymnastics pulling a mid-stream strategy change. Do not begin to call a losing speculation a long-term investment. Do not rationalize or try to explain why you don’t or will not sell. Losers should be sold. Sell, be done with it and take it as a speculation failure to improve your overall investing performance.
Litigation is high risk
The majority of my operating business career was managing turn around situations. Litigation was often part of those business projects. As a result of a string of successes, I grew comfortable and confident around litigation. That gave me the false confidence that I could make investments when litigation was part of the scenario. I began thinking I could pick the winning side in business litigation cases. That was a foolish mistake.
A record of success when controlling the situation was very different from being an investor in a company involved in litigation. That is why every competent litigation lawyer advises, litigation is always a crap shoot, you can never know what a court will do or decide.
Betting on the outcome of litigation is very high risk. Trying to make money betting on the outcome of a court case is a very high risk bet closer to buying a lottery ticket than to investing. Lets hope my speculation failures improve investing for you so my losses become lessons that you profit from!
Failures improve stock markets
Speculations can produce big returns but high speculation risks can produce failures and possible total losses. Those investment failures can improve dynamic ever changing stock markets. That is part of the ever changing evolution of investing.
continually evolves while recording many success, some failures and a number of struggling listings. By clearing out failures, investors move on to other opportunities and markets gain strength by leaving the weak behind. That cleansing effect of capitalism supports greater economic strength. By removing failures, the effect improves markets and the economy that enables investors to move for improved returns.
Do high risks equal high returns?Answered!
Experienced investors know the skill of managing risks and returns as they work to move returns up while lowering risks. Knowing risk and return are related but they also can be moved independently of the other. Knowing complications, risks and shortcomings of speculation strategies may deliver spectacular but too often at higher risks.
Lesson takeaways, Speculation risks, returns and failures:
Managing speculation risks, returns and failures are wealth building skills used to seek high returns in speculative plays with risks including possible failures or total capital loss.
- Speculation is a choice with risks that can be high
- Speculations do not earn income
- Speculations can be trading on steroids
- Rip Van Winkle speculations
- Speculators know the subject industry and market
- Junior resources can be great speculations
- Speculators know how to buy well
- Speculation failures teach lessons
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Speculations can fast and complete failures!
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Courts kill investor money!
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Never average down!
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Sell losses to get money back to work!
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Don’t play mental mind games to justify bad speculations.
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Litigation is a painful costly, bad bet. Always avoid this risk!
- Failures improve stock markets by getting removed.
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- Only use high risk capital to speculate.
Other lessons related to: Speculation risks, returns and failures
Investing buy high sell low – true or false
Headline news and stock market risk
Know the trend for market direction
Weeding your investment portfolio
Nelson Mandela touched investors
Investors can deposit and WAIT!
Being an exceptional investor builds wealth
6 Small investor advantages Warren Buffett knows
Stock market corrections – Seize the day or cover
Smart investors use smart diversification
More time in means more money out!
Winston Churchill sees opportunity in crisis
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Money Choices Grow Wealth,
lesson links:
Introduction to Money Choices That Grow Wealth Lesson 1
3 Basic stock market strategies Lesson 2
Investing factors time and knowledge Lesson 3
Stock market trading strategies Lesson 4
Speculation risks, returns and failures! Lesson 5
Next course:
How Investors Track Money
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