Yes, what about speculation? Well, many people speculate. I hear it on the radio everyday. They have interviews with all kinds of “specialists” who speculate about oil prices, stock movement, interest rates, inflation and what have you. And most of these “guru’s” believe themselves to be right. In fact, in many cases their companies invest clients’ money based on these speculations. I am going to write about this again. For the moment, don’t be influenced by this speculation too much.
But why is it called speculation? Because people are taking a view on the future, which is always uncertain. If they are right, it is good, if not, then …?
In the same way often speculate financially. We take a view on the future and buy into something that we always call an “investment”. Vacant land is not an investment, it is speculation. Yes, I know, you can make lots of money, but it is still speculation! Remember: an investment increases in value because there is an increasing revenue stream. In other words, because the income increases, people are prepared to pay more for it. With speculation, there is no income stream, so the only reason why it can increase in price, is because there is an increasing demand. This demand is either because of genuine scarcity, such as beachfront plots, or because the demand is driven by clever marketing. When you speculate (gamble), you buy something with the hope to sell it sooner rather than later at a much better price and make your money by taking a profit.
This is really exciting stuff and many people like to boast about the money they have made in a short period of time. And I am the last person to tell you should not do it. But there are certain rules:
Firstly, acknowledge it for what it is. Call it speculation and don’t get confused with investing. Speculation normally has a short time frame. It is in and out, hopefully before you pay a cent.
Secondly, don’t use rent money or the children’s university money to speculate. There is an old proverb in the marketplace: A long-term investment is a short-term investment that went wrong. I know of many people who are paying a very big price for speculations gone wrong. As a general rule, never speculate with more than 10% of your capital and be sure that you can afford to LOSE it. In other words, do proper risk management.
Thirdly, speculation comes third in the line of saving and investing. Once you are financially free, you can speculate as much as you like without putting your life at risk.
There are endless opportunities in this world, but not every one is the right one for you. Be selective and choose the opportunities that fit your circumstances and your risk profile. And calculate the risk carefully.
Tags: Investing
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