Speculating and Investing

Speculating and Investing

May 28, 2021
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My Grandpa's Speculation Story

I think every family can point to a past “investment” that was really a speculation.  I recently had a phone call with my 102-year-old grandma Elmyra, age 97 in the picture above. She told me a story about Grandpa Earl almost losing the farm sometime in the late 1940’s or early 1950’s.  The details are a bit fuzzy, not because she cannot recall but because grandpa did not divulge all the details.  It was a moment in time where a lesson was learned and never repeated.

Grandpa was a bit of a gambler and he liked a good game of chance.  It kind of goes against the general thought that farmers are conservative and safe.  Take it from me, most farmers and ranchers are gamblers.  Life experience teaches the survivors how to size their bets better as they get older.

The story goes that the year before, grandpa traded commodities futures contracts and made a good deal of money doing it.  The gambler was hooked and looked to keep up the good fortune.  Commodities have been traded since the dawn of civilization and futures contracts are an integral part of our current farm operations.  In year two grandpa got caught on the wrong side of the trade and was subject to “margin calls”.  A margin call is a demand by a broker that an investor deposit further cash or securities to cover possible losses.  These margin calls went on for a few days before grandpa could exit the trade.  All profits he had from the previous year were evaporated and then some.  My grandpa was in his mid to late 30’s when he learned this valuable lesson.  The term “Don’t bet the Farm” has a literal meaning in our family.

Learning the Hard Way

Today’s Millennial investors are about the same age as my grandpa was and a lot of them are learning the ins and outs of our current investment landscape.  When engaged in the activity of investing, we sometimes mistake speculation for investing.  Understanding and identifying when we are investing and when we are speculating can improve our decision-making process.

Investing is generally long term in nature with a focus on asset ownership. It can be pretty boring, like watching paint dry. Speculating is often short term with a focus on price movement. It can be very exciting – triggering emotions ranging from euphoria to despair.

Identifying Speculative Assets

A speculative asset may be something new and/or unproven. For that reason, they are generally defined as being higher risk with the potential for greater return.

Speculative assets face increased uncertainty. For instance, we don’t know how they may respond in various economic situations, how essential they will become and whether government regulations will be supportive.

This increased uncertainty often results in wide swings in prices. Even assets that have been hugely successful, had periods of significant drawdowns in their (earlier) speculative phase.

Points to Ponder

As you make your investment decisions, be sure to:

  1.  Identify what is an investment and what is a speculative bet
  2. Understand potential outcomes of speculation, including the possibility of losing money
  3. Be sure the proposed change is in line with your plan and desired level of risk

 

Jason McGarraugh, MS, CFP®


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