Speculating is the Foundation of Good Investing

Welcome to this month’s newsletter. This month, I would like to talk about the importance of speculating when it comes to good investing, and why speculation is actually the foundation of good investing.

First of all, when we call ourselves an investor, we may tend to have a negative association with the word speculation, that I would say is not necessarily true. Because, in fact, we speculate more often than we think.

If I may, please let me generalise the term “speculation”. To speculate means to become involved in an activity that is less predictable and may have a higher failure rate than you would normally desire. So let’s look at some activities which may reasonably be considered to be “speculation”:

  • Getting married to someone with the hope of “living happily ever after”. With current statistics showing a less than 50% success rate on first marriages, and even worse on subsequent ones, we can safely put getting married into the category of speculation as the odds of a successful marriage is less than tossing a coin randomly.

  • Getting a new job in the hope that it will be better than the last one. Most employment these days doesn’t last more than 3 years, so we can say most people speculate most of the time with their career.

  • Starting a new business in the hope to become richer. Less than 10% of new businesses survive more than 5 years, let alone 10. So starting any business would, by measure of statistics, be considered to be a speculating activity.

  • Going to university to study a particular course in the hope of making a career out of it. Most university graduates end up doing something completely unrelated to their qualification so they don’t make a career out of what they studied. Again, it’s speculating.

  • Buying shares in an untested business such as a start-up company or a business with an unproven track record or model. Here you are speculating with your money as these types of businesses face a lot of uncertainty and unpredictability.

  • Getting into property development projects without proven experience and controllable resources or buying properties with very volatile historical performance. Again you’re facing uncertainty and unpredictability – that is you are “speculating”.

So you see, as part of our daily life, we have to speculate quite a lot because we face uncertainty all the time. While we can reduce the uncertainty through having more knowledge and control, that knowledge and control can only come from more experience, and more experience itself can only come from facing more uncertainty in the first place.

You may say, as investors, we try to control risk and minimise uncertainty, but we can only do so by having faced more uncertainty to gain that experience in the first place. In other words, to become a good investor you must first be a good speculator. You have to take risk to know risk and then learn to how control it.

It is in my experience, the most experienced investors have a great speculating spirit. They are not afraid of taking risks and learning from their mistakes. It is generally very hard to find great investors growing out of timid researchers who are afraid to take risks.

I can almost say that from a mindset perspective, the spirit of speculation is the foundation of good investing. If you have been taking a long time trying to work out how to safely invest your money, maybe it is time for you to simply start speculating a bit ☺. You might find it comes to you more naturally than you think.

Until next month, happy investing.

PS: As I am based in Melbourne, I am delighted to advise that our Melbourne office is moving to Level 7, 468 St Kilda Road, Melbourne VIC 3004 as of 12th May 2014. The new office is just 700m south from our current location. All our other offices remain unchanged.

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