Stock Investing: Buying on a whim

In future posts I will continue to teach analysis of companies you're interested in adding to your portfolio. There will be some discussion about financial math (mostly very easy, don't fret). There will be discussion about understanding the marketplace and how to make deductions about which way it's heading. There will be discussion about setting up an online portfolio so you can execute your own trades.

But for a moment I want to detour to a subject I've been asked about many times, and that is whether it's ever okay to buy a stock just because-- either your analysis indicated a low chance of success but you still wanted it, or you haven't actually undertaken any analysis, or maybe someone you trust just told you to buy a few shares.

It happens. I make speculative moves in the market too, though I've spent decades trying to resist the temptation and follow my training. When I do it, I'm often wrong and come up with a loss. But not always.

Look at it another way. Ultimately, stock market investment is a form of gambling, right? I mean, you're putting money on the table, betting a company will go up and not down, and you have effectively no power to influence the outcome. Might as well be roulette in that way--- except of course you do your research and so reduce the chances that you'll hit on Black and not Red. But things still go against you all the time, so it's still just an "educated" bet. Therefore, if you're going to do it anyway, be smart and limit your risk. Allocate a tiny percentage of your investment funds.

A purely speculative stock play is when you buy (or sell short, or whatever) a long shot. It could be a long shot for any number of reasons: tiny player against a market behemoth; inexperienced executive team; great idea but basically no funding; millions of customers but loses money nonetheless; "overpriced," so more likely to fall than to rise much from its current level; brand-new stock in the market, so very limited financial information to go on. But for whatever reason, you want it anyway.

an Audible book on an old iPod

I bought Audible.com many years ago, in the late 90s when few had heard of it. This was a company that allowed you to download digital audiobooks via the internet and copy them to your harddrive or a CD (pre-iPod). I read about it, tried it, and was blown away. I thought it was the wave of the future: everyone is busy, everyone is multitasking, no one has time to sit and read anymore, they can listen in the car, and so on.

Audible dropped about 20% in the next few months, then fell another 10-15%, and sat there. I held it for about 3 years, waiting for it to finally pop. It never did, and I ultimately gave up and sold at a loss. In 2008 Amazon picked up the company for a song. Hardly surprising in retrospect.

I knew it was a long shot-- in fact, I thought at the time it had gone public too soon, before the market was really clamoring for the products, before it was hot. But it was so terrfic I thought I had stumbled onto the next big thing and I could get in early and ride it all the way up.

I did the same thing with Netflix in about 2004. Shockingly easy to use, fun, and growing fast, but still a very cheap share price in my mind. (One reason it was cheap was the analysts all said it would get killed by Blockbuster, so no one wanted the stock. See what you learn if you bother?) I jumped on that train too and got squashed over the next few years as Netflix and Blockbuster duked it out, then Netflix and Walmart. Should have sold out and put my money elsewhere until Netflix stock finally caught fire, which was more like 2008. By then they were slaying everyone else in the video rental space (before they went to on-demand video). I eventually did well with it but I was forced to absorb a substantial opportunity cost for several years because I let my eagerness have its way.

The original Tesla Roadster

Speculation has worked for me as well, but less often. I bought Tesla the day it went public because I felt the initial offering price was too low for the crazy market buzz surrounding the company. I was right that time: the stock rose very fast and I got out less than 48 hours later with more than a 50% gain. (It has since been a rocket ship, but I missed the ride because my analysis of the company has never adequately explained its sky-high price since 2012.)

Bottom line: if you're going to play market roulette, use just a tiny chunk of the money you generally invest. Think of it as a bit of play money, maybe 5% of your portfolio. That way, when you get your ass handed back to you on a plate, you won't have really damaged your long-term success. And if you get lucky-- because that's what it is when you hit it on a speculative buy-- you can treat yourself.

Drifting to Fifty  |  Random unrelated nugget of the week
Invest in high-optical-quality, UV-blocking sunglasses and wear them outdoors at all times. You only get one pair of eyes. Take good care of them. If you damage them there are no second chances.