Some Rules for Speculating

Let’s face it – we’re ALL speculators in some way or another. If we analyze what speculation means, in a general sense, we can then see how it relates to all aspects of financial survival. Done correctly, no form of speculation resembles a kind of gambling where the odds of success are out of your control.

Wikipedia.org defines speculation: “Financial speculation, involves the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives, or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. Speculation or agiotage represents one of four market roles in Western financial markets, distinct from hedging, long- or short-term investing, and arbitrage.”

The website goes on to say that speculation means literally, from the Latin derivation, speculatus, pp. of speculari “observe,” from specere “to look at, view.”

When you take the “financial” definition together with the literal meaning, we can generally say speculation is “based on well-considered observations, taking a pre-perceived risk in hopes of or in anticipation of future reward.”

As an example, anyone who has ever gone to college(and has strapped oneself or his/her parents with college loans) does so with the knowledge that there is a strong likelihood of attaining a job that will pay handsomely enough to not only pay back all loans, but also to make a decent living. “Observation” of the many current factors, and possibly the observation of one’s parents’ past situations(that they too went to college, and possibly majored in the same thing, and did well for themselves), one would come to the conclusion that “speculation” in a college education is money well-spent. That is not to say that all goes well for students who don’t plan and who are not dedicated enough to do their homework or learn their subjects. College truly becomes a gamble when the student picks a major that has a questionable outlook in the current job environment. The student is gambling on the fact that things will get better, when he knows that current data says otherwise. His risk of failure at this point is rather high, unless he is willing to take a circuitous route to success after graduation(if success is part of his plan), or, unless he has realized that he should cut his losses(of time and money) and come up with another plan.

Real estate is another form of speculation which can be mentioned to further my point, which is, when done correctly, speculation is not gambling. Based on the same premise as above, a real estate speculator performs mind-boggling calculations and analysis before putting any money down on a piece of land or property. We can safely say that if this real estate speculator has done this for any length of time, that he knows what he is doing, which means that he has a plan to follow, and follows his plan religiously. How does formulate a plan? Well, he does his homework on all factors related to his business. Part of his plan for speculation in real estate will be to know how much money(and how much time) he will risk on a property before realizing that he is wrong and has made a bad choice.

So far I have stated in somewhat random fashion all the keywords that should be part of the rules for “speculation”. I’ve shown in a couple of examples, quite a few of us fall into the category of speculator without even mentioning stocks or commodities(which is this author’s main love). Specifically, the keywords are observation(analysis), planning, dedication, risk, reward, and business.

The rules for speculation in the stocks or commodities markets are the same as for any endeavor in which wants to succeed, and are as follows:
1. You must treat speculation(or some may even include trading in with this term, since they believe it too is gambling) as a business, as you would any other business. This business will have a P/L statement, just like any other business, and the goal, hopefully, is for your business to be around for the long haul.
2. So, if you can accept rule 1 as fact, you must learn what every other speculation business does that is as successful, and especially, more so than yours. This includes knowing all of the tools of the trade that would allow you to be profitable. You are, after all, in competition with every other speculation business out there that would love to have your money. These tools are fundamental and technical(chart) analysis. This is a given, since all major financial institutions have the best of these tools, and they are obviously necessary.
3. In order to be the best at using the tools mentioned in rule 2, you must have the dedication of someone who is treating speculation as if it were their sole job or business.
4. As mentioned in the real estate example, you need to know, based on all the analysis using the tools that you have at your disposal, how much you will risk as part of an overall plan for staying in business long-term. That is, you will know in advance how much any particular speculative trade is worth risking, based on how much you have to lose. So, if you’ve laid out your plan correctly and believe in it, you stick with the plan when you need it the most. This includes bailing out when you’re wrong at the prescribed amount of risk, and not a penny more.

All of these rules will keep you in the financial game for the long haul.