Sometimes, timing is crucial.
I first invested in VEREIT shares back in 2016. For those who don’t know, VEREIT is a real estate trust that trades on NASDAQ. At the time, it looked like this was going to be a turnaround story. I was interested in joining because Glenn Rufrano, the CEO, had a reputation for successfully turning around troubled businesses. I believed he could steer the business in the correct direction and sell it to a more powerful real estate player. The catalyst I anticipated was that prospective acquisition. If it actually happened, I anticipated significant gains.
The Key Is Patience
Fortunately, the turnaround took a lot longer than I anticipated. That bid to purchase the business likewise fell through. But I had trust. Weeks transformed into months, which later transformed into years. Despite the stock price’s wild swings caused by interest rate concerns, I held onto my holdings. Even during the pandemic crash, when the stock fell from a split-adjusted price of $50 down to $20 per share, I stayed invested.
By April 2021, I had had enough. I had become tired of waiting for the acquisition, which now seemed unlikely to occur. The interval was five years. My shares eventually sold for about $36 each. Though not nearly as much as I had intended, I was able to make a little amount of money. Since I had purchased the stock, its value had increased slightly, and I had had a number of sizable dividend payments. However, if I had simply invested in the S&P 500 throughout that time, I could have gained a lot more money.
I’m a Master of Timing
The subsequent events were like something out of a movie. Ten days after I sold my stock, VEREIT revealed it was merging with Realty Income. VEREIT shareholders were going to get a good chunk of REalty Income shares and they were worth a lot more. Are you serious? Simply holding out for an additional week and a half would have resulted in a 30% profit.
It was one thing to lose money. However, the fact that I stayed for five years in the hope that the company would be sold made this announcement all the more devastating. Then, almost immediately after I gave up on that dream, it came true! When it comes to stock investments, I don’t typically display a lot of emotion (especially in front of the public), but come on! Right? In this stock, I persisted for five years. How could my timing be so poor?
The Importance of Timing (When You Speculate)
Time for frank introspection. I was merely speculating that something would happen to send the stock price skyrocketing. It didn’t work out for me and was never a guarantee. If I’m being completely honest with myself, I should have left years ago. I defended holding for far too long by convincing myself that it was more of an investment than trading speculation.
But that was a misstep.
In a way, I consider it a blessing that this longer-than-usual trade resulted in some profit. The majority of financial errors typically don’t enhance your portfolio. However, I should have kept in mind that there are investments and speculative positions. The two can occasionally be confused, however, there are significant differences between them. I was caught attempting to combine the two and paid the price both emotionally and materially.
Speculation: What Is It?
All of this raises the question, what constitutes speculation? Basically, speculation is betting on whether a stock will increase (or decrease) as a result of a specific short-term event. In 2016, I wagered that VEREIT would be rapidly bought. It didn’t take place. I ought to have left at that point. This is distinct from investing, which is having confidence in the success and long-term growth of a company.
Alternatively, you may speculate that something negative is likely to occur and short a stock (bet that the price will decrease). The stock market was widely predicted to plummet just before the virus spread globally by many people. Enough people were alarmed by the news that began to filter out of China in January and February 2020. When everything fell apart at the end of March 2020, several of these speculators closed out their short positions rich. They would have suffered exorbitant losses if they hadn’t, given the market has only gone up subsequently.
Speculating is Basically Betting on Timing
As you can see, with speculative bets, timing is quite important. Even if you are correct, you might not get paid until everything works out exactly at the appropriate time. You must enter and exit at the precise right time (and price). Just look at the GameStop stock boom, fueled by a group of speculators that believed they could anticipate (and affect) the future price of the $GME shares. Those who timed it correctly made a ton of money. Those that mistimed it are left with the bill for those who have already cashed out.
Every day, the general public speculates on stock prices. They typically lose money in most cases. Because of this, some individuals compare “playing the stock market” to gambling at a huge casino. I intentionally use the word “bet” when describing some of my stock recommendations. Yes, I do like to think that my bets are well-informed and knowledgeable. For instance, if I hadn’t known that VEREIT’s properties are generating revenue from rent and that the firm’s financials are appealing to a buyer, I wouldn’t have placed a bet on the company being acquired. A speculative trade is still essentially a gamble. As you can see, gambling has no set rules.
Speculating Causes Major Money Losses for People
The other day, I was perusing the Reddit finance forums. One person there was genuinely looking for advice on his speculative position. When he invested in Dogecoin, he believed he would become wealthy. The absurd cryptocurrency appeared to be popular and on its way “to the moon! Unfortunately, this man’s speculative wagers were terribly timed. He staked not just his own life savings but also the savings of his girlfriend on the coin.
He purchased when each coin was worth 60 cents. There were many internet supporters who believed the price would eventually reach $1. (or higher). Sadly, the price rapidly fell to 40 cents, costing his Redditor a third of his investment. He has even less value today because the coin is only worth roughly 21 cents (if he still possesses it).
However, this individual wasn’t really looking for investment guidance. He understands that the money is already gone unless Doge has an unlikely comeback. In reality, he was seeking guidance on how to move forward in his life and relationship after betraying his girlfriend’s trust. As you can see, losing on risky bets might have much more severe real-life repercussions.
Tips For Speculation
There are innumerable other stories in addition to this one. Many people gamble away their life savings on speculative trades because they believe it is straightforward and easy to become rich quickly. Most speculators are clueless about what they’re doing. There are three things you must unquestionably understand before engaging in another speculative trade.
- How much cash are you willing to risk?
- How long are you intending to continue the business?
- What is your backup plan in case the scenario you are speculating on doesn’t materialize?
You might be fortunate once or twice. However, if you continue to bet, your inability to come up with a comprehensive plan in advance will cost you.
Investing Is Very Different
The equities markets don’t have to be viewed like a casino, which is a good thing. All you need to do is shift your mindset to one of an investor rather than speculation. Investors do not search for a particular catalyst that can cause short-term price changes. They intend to take the long view.
Stock values fluctuate a lot. They primarily adhere to the rules of supply and demand, therefore short-term price changes may occur for any reason. Massive short-term fluctuations can result from anything as dumb as a soccer player taking a Coca-Cola bottle out of a press conference. However, over time, a company’s stock price will reflect its performance. The stock will definitely improve in value if they maintain its current pace of sales growth, cash accumulation, and financial performance targets. If you want to invest, look for businesses that will be profitable in the long run. Five, ten, or even twenty years from now, the value of those stocks will have increased. That is a genuine investment.
To Begin, Invest In An Index Fund
We often advise the typical investor to invest in a total market index fund. I put most of my money into one of these. When you invest in an index fund, the entire market is yours. You will become wealthier over time if the market as a whole continues to grow in value. In Particular, I put money into the Vanguard Total Stock Market Fund (VTI). It has thousands of American businesses that strive for financial success. In other words, it isn’t trying to profit from speculative day trades quickly.
Yes, there are occasions when the price of VTI stock plummets. But because it has never failed to bounce back, I can rest easy knowing that the fund’s value will eventually be just fine. My investments will continue to increase in value when I retire as long as American businesses keep innovating and raising their profits over time.
Investing In Individual Securities Is Still An Option
Don’t get me wrong, though. You are still allowed to invest in individual equities if you want to. One of my pals has long held Tesla stock. Years ago, when he realized that electric vehicles were most certainly the future of transportation, he made his initial investment. There was no other company producing electric vehicles at the time that could compare to Tesla.
He was in it for the long term rather than betting on a quick catalyst. He thought that as time went on, Tesla would sell more and more cars, which would raise the value of the company’s shares. He was correct, as Tesla stock, which was only around $300 a year ago, now trades for approximately $680 after peaking at almost $900 in January. My friend is keeping his shares since the business is still expanding and changing, and he expects to make even more money in the future.
Compare my friend’s strategy to that of someone who, for instance, purchased Tesla shares on the assumption that the new Biden administration would authorize additional tax incentives for electric car manufacturers and their customers. Such news would undoubtedly temporarily increase Tesla’s stock price. The investor then closes out their position, collects their earnings, and moves on to the following wager. Do you see the distinction between that and investing directly?
You Can Also Speculate With Index Funds
Simply because you purchase an index fund does not guarantee that you are investing and not simply speculating. The Vanguard index fund might have easily been shorted by those who believed that the early COVID-19 findings would result in a pandemic. It undoubtedly decreased (along with everything else in March 2020), so they had the opportunity to make a quick profit. People still frequently place speculative wagers using index funds nowadays.
Before each Federal Reserve meeting, a lot of people place wagers on the direction the market will take. Due to the scale and liquidity, these funds offer, they are primarily traded around index funds. If you’re purchasing index funds for the short term, just don’t fool yourself into thinking that you’re actually investing (instead of speculating).
Plenty of People Earn Money Speculating
Hopefully, by now you can see that investing is considerably safer than speculating. Nevertheless, a number of people profit greatly from speculation. Even if they have no understanding of what they are doing, this is still true.
Just now, a friend of mine informed me about how his basketball buddy won $1 million by betting on the AMC meme stock. For those who don’t know, the AMC network of movie theaters suffered significantly from the pandemic’s closures. Hedge funds were heavily shorting it, while Reddit ordinary investors bought in large quantities to raise the price. This man invested all of his savings in AMC at a price of $10 because he was so confident in the concept. It’s worth about $50 right now. My friend continues encouraging him to sell because AMC stock is currently very unpredictable. Some days, the price swings by more than 20%. He is currently holding on. Nevertheless, I hope he does it quickly before the bubble pops. He made a wise guess at the correct time, which paid well.
The same friend has a second bizarre tale. Apparently, immediately after the 2017 Bitcoin price craze, his cousin invested a little sum of money in Coinbase (COIN) a few years ago. Back then, Coinbase wasn’t all that well-known and had received some angel investment. Other than the fact that they work with Bitcoin, he knew very little about the company. However, he simply made a number of purchases on a pre-IPO website, reasoning, “Why not? It merits a try.
His shares were worth $8 million at the time of Coinbase’s IPO a few months ago. $8,000,000 large ones! Gambling can be successful even if you have no prior experience. Just keep in mind how uncommon it is.
How To Succeed In Blind Speculation
These tales can make you envious. However, there are hundreds more losers for every successful investor. If you know what you’re doing, you can succeed financially. But if you don’t properly understand how the markets operate, you could lose a lot more money over time. Speculating turns into pure gambling when done without a plan or any real knowledge. Can you win money playing poker? You certainly can. Lotteries and slot machine jackpots are frequently won by individuals. Simply put, the deck is firmly stacked against you.
I’m reminded of a comment Danny Ocean made in the motion picture Ocean’s Eleven by this.
“The house always wins. Play long enough, you never change the stakes. The house takes you. Unless, when that perfect hand comes along, you bet and you bet big, then you take the house.”
Gambling is dangerous!
The Bottom Line
Instead of only speculating, we want to encourage more individuals to invest. It’s not impossible to profit from speculation. In reality, I am aware of many individuals who have made it big through speculating in recent years. Just that building wealth through investment is a lot more reliable. One could argue that building wealth gradually is preferable to doing so quickly.
When I went back to look up the VEREIT price chart to write this essay, it still hurts a little. You won’t quickly forget five years of holding on and missing out by 10 days. However, all it takes is a quick glance at the price graph of one of my other investments to be reminded of how beneficial the past few decades of investing have been to my wealth. I have nothing to grumble about.
Featured Image: Unsplash @ mayofi