You're not going to get rich like Warren Buffett if your investment strategy relies on luck or hope…
In the sharemarket hope and luck are two things which should be kept to an absolute minimum.
You see, Buffett didn't become the world's second richest person this week by taking a bunch of high-risk high-reward 'punts' where success and immense wealth were fortuitously bestowed.
Indeed nearly all successful investors will, first and foremost, invest only in securities with low-risk, high-reward potential.
If you're the steward of your own wealth, it's most important to recognise it's better to save money, than it is to make it…
For example, the above graph shows a conservative value investor (blue line) and speculator (red line) who each have $10,000 to invest. In the first year, the speculator takes a punt on a high-risk stock and loses 50% of his or her money.
Unfortunately, the speculator must then achieve 10% per year for another 16 years just to breakeven with the conservative value investor who makes 5% per year from the get-go. Ask anyone, that's easier said than done.
Don't invest more than you can afford to lose.
For good reason – see above – speculation is oft considered akin to gambling.
But, let's be 100% truthful for a second, who doesn't like to take a little punt every now and again?
Personally, I'd love to claim I'm impartial to the allure of catching the next Liquefied Natural Gas Ltd (ASX: LNG) and enabling my personal wealth to experience a significant step-change. But I'm not.
I believe that so long as your speculative interests are kept to a minimum (say, less than 5% of the value of your portfolio) and done with a sound appreciation of the risks involved (knowing you could lose all of your 'investment'), it's admissible.
3 stocks to unleash your inner speculator
- Netcomm Wireless Ltd (ASX: NTC) is a developer of machine-to-machine (M2M) and wireless broadband products for use by telecommunications providers, enterprise and households. The group recently swung to profitability in a big way but 2015 looks to be another strong year for the $62 million company, as it continues to form key partnerships and benefit from massive industry tailwinds.
- Admedus Ltd (ASX: AHZ) is a company I've held for a while, watching my paper profit swing from 0% to a gain of 200%, then back again. It's an unprofitable junior biotechnology company which is currently marketing its flagship CardioCel tissue regeneration product whilst also pursuing an ambitious vaccines program. Despite clinical success the market appears to be losing faith in the company's ability to commercialise CardioCel and whilst it's too early to tell for sure, I'm hanging on to find out.
- Nearmap Ltd (ASX: NEA) is perhaps the least speculative of all three companies because the $220 million company is already profitable and appears to be carving out its own, significant, competitive advantage. The provider of ultra-clear aerial photography recently laid out its US growth strategy and its shares took off. It'll look to leverage off its local success and disrupt incumbents, in a big way.
Foolish takeaway
Sometimes it's only a fine line between speculation and investing. But if you're investment thesis relies on something which is going to happen, then you're already in the grey area. In my opinion however if you hold a solid well-diversified share portfolio, you could allow yourself to take on a bit more risk and the occasional punt on tomorrow's hottest stock.
