Speculation is reasoning based on inconclusive evidence, or wishful thinking, or conjecture or supposition. So a speculative investment is one that someone might buy as long-term investment because of a thesis (theory or notion) that the investment could be valuable in the future. It is generally based on a thesis that’s not currently verifiable by data or past history.
Therefore, speculation involves taking a chance on an investment based on limited facts. It’s a high-risk investment with a huge potential for loss or complete failure. Therefore, it is like buying a Wisconsin lottery ticket which has a high-reward for a very small number of people. It is a gamble for those with a strong appetite for risk.
Home Run Investing
Far too many novice investors, and even some investment advisors gamble more than they invest. If they are playing baseball, they want home runs. They want every time at bat to be a home run and they would like to see results now or very soon. My investment advice (and my approach) is to hit multiple singles, and maybe even a double from time-to-time. Therefore, I do some research before I buy an investment. That isn’t to say I never speculate. I certainly have speculative investments in our total portfolio, but they make up a very small portion of the total invested dollars. Truth be told (and that is what most of my readers expect), most of my speculative investments turn out to fail even to bring home a single, much less a home run.
There are also ETFs and mutual funds that are highly speculative. For example, ARKF is a real loser. ARKF is the “ARK Fintech Innovation ETF.” It is an innovative way to lose bigtime. You just have to look at the top ten investments to see why: Block Inc, Shopify, Twilio, Coinbase, Robinhood Markets, and DraftKings are in the top ten. If you look at those, you will see SPECULATION in CAPITAL letters.
I was thinking about this type of investing today because of a question I saw on the Fidelity Investor Community page. An investor who identified himself as a beginner had purchased $200 of UPST. He was trying to decide if he should buy more given the drop in the value of his investment. I went to Seeking Alpha to see if I would buy shares in the company. The answer: absolutely not. In fact, in terms of speculation, this investment is the worst of the worst.
Upstart Holdings (UPST)
On the surface, UPST might appear to be a good investment today. For example, it is a financial business with a P/E of 16.03. Therefore, it has shown some profitability. However, note that this business was founded in 2012, so it is ten years old. However, it has not been a publicly traded company until recently. Furthermore, in October 2021 the shares were trading at close to $400 per share. They are now worth about $27. Ask yourself this question: “If investors were buying shares at $400 less than a year ago, and they are now down to $27, why did the price drop so far so fast?” The answer is there were a lot of speculators speculating. Think what the P/E had to be in October when the earnings were less than $1 per share for the quarter and are estimated to be $1.69 for F2022.
“Upstart Holdings, Inc., together with its subsidiaries, operates a cloud-based artificial intelligence (AI) lending platform in the United States. Its platform aggregates consumer demand for loans and connects it to its network of the company’s AI-enabled bank partners. The company was founded in 2012 and is headquartered in San Mateo, California.”
If you want to have success, don’t chase ideas, or buy on the recommendation of an investment newsletter. Determine the factors you deem necessary to add an investment to your portfolio. If the stock or ETF or mutual fund does not have those favorable factors, move on, and find something else worthy of another solid single in your portfolio.