The Safest Approach to Investing: Speculate!

It’s deeply ironic, but in many respects the safest approach you can take is to view everything you do as a speculation. If you have a good-paying position today, what are the odds you’ll still have it tomorrow? Could your job be outsourced, your company downsized, or your position refilled by someone better educated, more qualified or younger?

When you purchased that piece of real estate as a long-term investment, were you counting on your current or future income to pay for it? Is it increasing in value? Did you buy with the attitude that prices can’t go anywhere but up, not considering that you might be riding a real estate bubble that could one day burst? Or were you blindly following the advice of Will Rogers: “Buy land; they’re not makin’ any more of it”?

Maybe your ancestors struck it rich in real estate, but that doesn’t mean your purchase came with a guarantee that said, “This property will earn you 20 percent in ten years!” Despite what many would like to believe, buying real estate is not necessarily a money-making investment. That should be abundantly clear from plunging real estate values, the sub-prime lending debacle and the Wall Street meltdown that’s resulted from it. As is the case with any financial asset, the price of real estate will fluctuate down as well as up. And any asset that doesn’t come with an up-front guarantee of return of capital has to be considered speculative.

Life’s other speculations

People enter into all sorts of ventures with the best of intentions, with or without the up-front analysis called “due diligence,” and still expect favorable long-term outcomes. For example, they commit to religions, obtain higher educations, join gyms, support their favorite sports teams, take new jobs and get married.

Would you consider marriage, one of the most important decisions in life, an investment, speculation or gamble? We assume you gave the right answer. That’s right: Marriage is the mother of all gambling ventures, still considered a social and religious obligation despite high divorce statistics. Marriage comes with no guarantees whatsoever and often has ups and downs like those of the stock market. Emotions can overshadow rational thinking, which is why you need to conduct up-front due diligence on the intellectual, spiritual and physical levels — whatever that may entail — before taking the plunge.

Keep your emotions in check

You can get into all kinds of trouble when emotions drive your life — whether you are choosing the right job, the right spouse, and of course making any financial decision in which outcomes can’t be guaranteed. Life is a risky business indeed. And the exchange of financial assets — whether real estate, stocks, bonds, mutual funds, or entire businesses — is about the transfer of risks.

That transfer may occur between someone who no longer sees the opportunity as attractive (do they know something that you don’t?) and one who sees an attractive opportunity (you?), but may be caught up in the euphoria of rising asset prices and end up holding the last bag. You have to keep your emotions in check if you are to speculate in the strict sense of the definition.

Before you take risks on real estate, mutual funds, commodities, a start-up business, the stock market or any other financial asset, analyze whether or not are you doing so compulsively or intuitively, based on “gut feel,” or just “because everyone else is making a killing.”

Have you gone through a comprehensive analysis and researched the current risk environment? It’s not uncommon for your emotional and your rational self to have diverging opinions. There’s nothing wrong with that. But before you pen out a check or, for that matter, “bet the ranch,” make sure you double check your views and emotions by looking at the capital markets. That’s where the real market value of an instrument is usually determined.

Even then, be sure to examine the fundamental economic and financial factors of any speculation, rather than rely solely on the collective opinions of crowds and traders. The reality is that their decisions to buy or sell may have nothing to do with an earnings report or an economic forecast, but be driven by emotions, or contingent on the good or bad mood of a particular trading day.