Today I want to talk to you about several strategies and rules I follow for speculative investing. When investing, I make it a point to not only keep my end goals of developing wealth for the future in mind, but I try to keep myself as engaged as possible at every turn. In an effort to accomplish this, I try to keep about 3%-5% of my portfolio speculative. Speculative just means there is a higher risk of loss in the investment. However, the potential gains can be massive and if you have a good idea, an opportunity, or strong fundamental reasoning behind your play, you could hit one out of the park.
When trying to pick a speculative stock, I have a few rules that I try to stick to. One, make sure the potential reward is at least 4 times your current investment. If you are not going to hit a grand slam, stay out of the speculative ball park. It’s just not speculative enough to warrant your continued interest.
Two, I try to make sure the fundamental story is sound. If you are investing in some pump and dump penny stock scheme where you are dealing with a tech company run out of the parents garage, and no sound story or products to speak of, stay away.
Three, often times when investigating speculative stocks, you will come across a Biotech company. If so, make sure the founders have a track record, a PHD or MD, and I like to look for impressive resumes in these scenarios (Ivy league degrees).
Four, do research. Make sure the company actually has a viable product or service. Make sure the product or service is something you would use or consider using if you were their target customer. Make sure you know how they are being funded. Who owns the company? Who makes up the company’s board? The more built out the operational components of the company is, the higher the potential for success, in my experience. Who has invested in the company? Look at the track records of those investors. You willl frequently find that the top investors in a given space, knock it out of the park more frequently than those who have no idea what they are doing. These people have a track record for a reason. They do their research. If you can follow the investments of a good investor, it actually could negate the need for copious research.
Five, to keep yourself interested, Make sure you find the story or product interesting or necessary in your own life. If you are not jazzed up by the product, you won’t care as much about the stock. Get behind something you want, maybe in your own life. This will keep you from jumping ship at the slightest sign of weakness. And there will be signs of weakness and volatility.
Which brings me to my sixth point…Make sure you have a strong backbone. Speculative stocks are volatile. Make sure you keep the reasoning behind that volatility front of mind. Is the price going down because of poor sentiment or a fundamental factor you need to be concerned about? Listen to earnings calls. Make sure the leadership is pumped by the company. A lot of times you can intuit the outlook of a CEO on an earnings call. Granted these people are masters at making the bad seem good but still, listen for different queues like the inflection of their voice and the words they are using. Are they pushing the fact that they are still massively interested in the product or service or are they sort of laid back and not especially jazzed about the future? Is that indicative of their general demeanor or something systemically wrong?
Number seven, I do not overcommit to a speculative play. The moment a speculative financial instrument reaches 5% of my total portfolio, I’m staying still or pulling back. I do not want to be overcommitted to a speculative play.
Number eight, for psychological reasons, I recommend keeping spec plays in a separate account from your other investments. The volatility will increase or decrease your account balance which could trigger a negative impulsive to sell prematurely.
So, what specific speculative play am I looking at right now?
I am very focused on ticker LCID or Lucid Motors. If you haven’t seen the car the Lucid Air, go check it out. At the moment, it’s essentially a high end Tesla. I love love love Tesla, but I have been a bit underwhelmed by the interior design features of all of the Tesla’s and quite frankly, the lack of exterior design changes over time. The Lucid really picked up where Elon has left off on those interiors. Now at the moment, they are going after two different consumers. Elon is trying to focus more on getting these cars out to general public and not focused as much on the high end market, though he still makes high end models S and X. Lucid seems focused on targeting that higher end market over the next 5-7 years which in my opinion is a nice niche to be in. They are burning through capital like crazy – I think they are funded through the middle of next year. They are receiving funding from Saudi Arabia. Saudi Arabia is highly committed here and I feel they are so deep in that they may just keep investing until the car is easily accessible to he public with service and sales centers in high traffic areas like Tesla. I also feel that this is a hedge against oil for them. Over the long term, the company plans to bring the price of their vehicles down to appeal to the general public. They currently boast the longest EV at 520 miles. The interiors of this car are beautiful. You have to go online and see them and you will understand why I am such a fan of the product. I am not a buyer of the vehicle yet because they don’t have service or sales centers near my house. They have a deal with electrify American which is how and where you can charge the vehicle if you need to drive across country.
To conclude, if you are going to speculate, I highly recommend doing immense research into the fundamentals of the business you plan to invest in. Look at it as zero sum – you either make money or you lose the whole thing. Also, and I cannot recommend this enough for every stock you buy, dollar cost average in. These stocks are highly volitle. Do not try to price the market. Buy over time. Prices go up and down so you want to optimally be as low as possible on the buy side so you don’t need to worry as much about that sale.
