Tag Archives: speculation

Retired Money: “Exploring” with baskets of individual stocks once the indexed core is taken care of

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Image via MoneySense.ca: Chris Montgomery on Unsplash

My latest MoneySense Retired Money column looks at how retirees can use a hybrid  “core and explore” approach to portfolios. Click on the highlighted headline for full column: How to master Core-and-Explore Investing.

For the average investor at or near Retirement age, I believe the “core” – the 80 to 90% of so-called “Serious Money” – can be held in balanced funds or low-fee indexed solutions like Asset Allocation ETFs from BMO, Horizons, iShares,  and Vanguard: a single such fund holds thousands of stocks and bonds spread around the world.

If your risk tolerance is high enough, that leaves 10 to 20% for a more adventurous “Explore” allocation that could go into more speculative alternatives to the mostly stocks and bonds held in the core. This could include new tech IPOs or cryptocurrencies like Bitcoin or Ethereum, or investment funds that track them, as Dale Roberts and I surveyed in twoMoneySense articles recently. Sadly, volatile cryptos and crypto funds can also generate comparable losses just as quickly so keep these to no more than 1 or 2% of a total portfolio and be quick to take partial profits in registered accounts.

If booking gains without tax considerations, you could put the proceeds into less volatile speculations. One surprize from 2020 and so far in 2021 is the glut of new stock offerings, IPOs, including the mania over SPACs, which I only touch on in the column.

The one rule for speculative single issues is not to bet your whole speculative budget on a single name. Older folk may choose “baskets” of four or five stocks in several sectors.

I’m normally wary of IPOs: some joke IPO stands for It’s Probably Overpriced. However, for the first time I recently bought an IPO on its day of issue: online vacation rental firm Airbnb Inc. [ABNB/Nasdaq], recommended by more than one investment newsletter to which I subscribe. That was the first time I bought an IPO the day it started trading, though I regret NOT having jumped on Google’s IPO back in 2004.

Recent IPOs

I prefer to wait a few months for new issues to settle: that approach worked with Facebook after it fell within a few months of its initially botched IPO. And recently I’ve taken post-launch “starter” positions in plant-based meat substitute maker Beyond Meat [BYND/Nasdaq], cloud data warehousing firm Snowflake Inc./[SNOW/NYSE, and the now ubiquitous Zoom Video Communications [ZM/Nasdaq.] Continue Reading…

Not another GameStop explainer

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The internet was all atwitter about the stock market the last two weeks, more specifically about the performance of GameStop stock, short-selling, hedge funds, and Robinhood (a free stock trading app in the U.S.). Financial journalists, pundits, and amateur investors all offered their hot takes on this ‘Reddit-fuelled’ market frenzy. My inbox also lit up with friends and blog readers wondering just what the heck was going on.

Many of these explainers were bad or flat-out wrong: a reminder that not everyone needs to have an opinion on the news of the day. The GameStop story is a fun distraction from the mundane stay-at-home routine. The stock is up 8000% over the last six months, causing short-selling hedge funds to take a huge bath on their trade.

Meanwhile, passive investors like me watch from the sideline with great amusement.

 

Rob Carrick summed up the story nicely when he said:

“But if you’re wondering what the GameStop story means to your future investing, the answer is nothing. Enjoy the show – but don’t take notes.”

If you’re simply curious about what exactly happened with GameStop stock and how it affected Wall Street hedge funds who were betting against the company, watch Preet Banerjee’s excellent explainer on the GameStop short squeeze:

And what exactly is Robinhood’s role in the GameStop saga? Vox explains why the popular stock trading app restricted trading on GameStop, Blackberry, AMC, and other supposed ‘meme-stocks’. Robinhood now faces a class-action lawsuit saying it manipulated the market by restricting trades.

Think the GameStop short-squeeze is the greatest ever? Not even close. Of Dollars and Data blogger Nick Magguilli tells the story of Piggly Wiggly and how one man took on Wall Street all alone.

[Added by editor: Yesterday, Gamestop shares had fallen to US$90, after a high of as much as US483 last week. See also Washington Post story on Feb. 2 entitled Game Over, describing how some first-time traders are reeling from the losses.]

Wealthsimple Trade

Here in Canada, our only zero-commission trading platform is Wealthsimple Trade. They took a different approach than Robinhood – rather than gamifying stock and option trading (only to restrict those trades due to ‘volatility concerns’), Wealthsimple allowed its users to trade GameStop and other meme stocks freely.

They sent out an education email with a useful explainer and warning about trading volatile stocks. They also included pop-up warnings to users through the app when they searched for GameStop and other volatile stocks.

Wealthsimple Trade became the number one app on Apple’s App Store this week as the company saw a 50% increase in sign-ups. My Wealthsimple Trade review was the number one visited article on the blog this week.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on Jan. 30, 2021 and is republished here with his permission.

Retired Money: Should Retirees speculate?

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My latest MoneySense Retired Money column has just been published, and looks at whether speculation has any place in the portfolios of retirees or those almost retired. Click on the highlighted headline to access the full column: Should retirees speculate? 

As I confess in the piece, even at the ripe old age of 67, Yours Truly has been known to indulge in the odd speculative investment, not always with positive results. You may have seen the oft-used distinction between “Serious Money” and Play Money, aka Fun Money or Mad Money. Mad Money typically means investing money you “can afford to lose,” which usually means relatively small amounts in individual stocks.

No one wishes to lose money, of course; on the other hand, the inevitable trade-off is risk and return. These days, young Millennial day traders congregate at the Robinhood platform: since the Covid crisis hit many of the most popular trades there would strike retirees as unabashed speculations: betting, for instance, that depressed airlines, hotels and cruise line stocks will soar once a Covid vaccine is available. The operative word with this cohort seems to be FOMO: Fear of Missing Out.

The advisors consulted in my MoneySense column say no more than 10% of your total equity portfolio should be allocated to speculations like penny stocks, marijuana, cryptocurrencies or other flyers. To me, speculations should be managed just like a venture capital fund approaches investing in risky startups: Of five specs, they figure one may go to zero, three break even and you hope the fifth results in the proverbial 10-bagger or even 100-bagger, assuming you’ve identified the next Apple, Amazon or Netflix.

Analogy to Las Vegas

While being governed by the 10% rule — which means the more you have the more you have available to speculate — personally I imagine myself in Las Vegas and set limits on what I intend to gamble with. (Let’s use that word, for in a way that’s what it is). Continue Reading…

Avoid costly mistakes in penny stocks and venture capital by navigating Speculation Booms

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In the 1990s and early 2000s, many Internet stocks rose to extraordinary heights based on the number of visits to their websites, rather than dollars in their bank accounts. Back then, lots of analysts and investors believed that these stocks could go on rising indefinitely. Instead, the Internet stock boom ended suddenly, like almost every speculation boom does. Most of the top Internet stocks collapsed and brought huge losses to investors.

Investors need to be wary when the signs of a speculation boom appear, especially in both venture capital and penny stocks. 

Venture capital investing is subject to a speculation boom

We rule out some investment areas regularly when we feel they offer bad odds of making a gain. For example, venture capital investing is always highly volatile. What’s more, high management and other fees tend to offset lots of gains in good years, and eat up a lot of your capital in bad ones.

Now is a particularly bad time for individual investors to delve into venture capital. That’s because a number of highly innovative technology investments have done remarkably well, and this has helped spark an enormous boom in the field. Money has been flooding into venture capital investments in recent years. In speculation boom, a flood of money tends to bid up the prices of all opportunities, good and bad.

Note, however, that many of today’s venture-capital success stories have yet to reach profitability. They are taking in ever-larger amounts of money from outside investors, and expanding their revenues by using these incoming funds to finance negative cash flow.

Even the most promising opportunities can fail to make the transition from exciting start-up to self-sustaining, profitable company.

You run into the same problem in venture capital investing as in penny-stock investing: It’s easier to launch a venture-capital deal or a stock promotion than it is to create a profitable business.

If you profit during a speculation boom, consider the “sell-half” rule for your speculative stocks

Selling half of hot stocks that surge helps you guard your profits. But apply this rule only to more aggressive stocks, and not to the well-established stocks that may surprise you by going a lot higher in the long run.

Knowing when to sell a stock is one of the most important factors in successful investing: it’s almost as important as knowing when not to sell. That’s why we advise investors to follow a key rule when it comes to rising stocks.

Whether your approach to investing is conservative or aggressive, the quality of your investments matters much more than your skill at selling. Continue Reading…

Think you’re not speculating in Cannabis? Check your Index Tracker

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Figure 1: Cannabis Stock returns

By Jeffrey Weniger, WisdomTree Investments

Special to the Financial Independence Hub

Live by market capitalization-weighting, die by market-capitalization weighting.

If you own a broad-based Canadian beta tracker, chances are you own upwards of five marijuana stocks.

Canopy Growth, the largest player in TSX-listed cannabis companies, is up 78-fold since July 2010. Aurora Cannabis, the other major player, has “only” been a 24-bagger since 2007. But if you really want to cherry pick, from that company’s bottom when it was a penny stock in 2013, it is up 49,180%. Sure, no speculation there.

You might be accidentally playing this mania without even knowing it. The S&P/TSX Capped Composite Index also has Aphria, CannTrust and Cronos Group sprinkled in. Granted, we’re only talking about 1.5% of total capital in the industry, but this group is so volatile that it punches well above its weight. What if the dot-com-ness of figure 1 gets flipped on its head?

J.P. Morgan analyzed 13,000 companies that were members of the Russell 3000 Index from 1980 to 2014 and found that 40% experienced a “catastrophic” loss. That means a decline of 70% or more in the price of a stock from its peak, after which there was little recovery such that the eventual loss from the peak was 60% or more.

What are your prime candidates for catastrophic loss? The Big Five banks? The rails? How about some companies that came out of nowhere, in a brand-new industry, owned by your not-around-during-dot-com next-door neighbour?

Think about catastrophic loss as you consider the outlook for the two biggies, Canopy and Aurora, in figure 2. I added the only other large Canadian health care firm (Bausch, the former Valeant), along with a few completely unrelated companies for some context.

Figure 2: Earnings per Share & P/E

 

The cannabis bulls will tell you that earnings in the coming years is not the proper valuation measure. But who among us knows what the marijuana world will look like down the road? I’m hard-pressed to see how Molson Coors, PepsiCo, Merck, British American Tobacco, or any of a dozen other giants will not try to get their hands on the pile of money that is supposedly sitting on the table. Continue Reading…