The Speculator as a Hero

The 1980s were the decade of the speculator--and now, 20 years later, we have such a window of opportunity again. Successful speculators should emerge from the first decade of the 21st century wealthy beyond their wildest dreams. Fortunately, it's a profession open to all. No formal education, credentials, or licenses are required. All training is on the job, and best of all, the apprenticeship is "earn while you learn." It's an appealing job opportunity, but unfortunately one that carries a stigma.

I've been known to talk about a lot of suspiciously asocial concepts: Financial crash, depression, hyperinflation, the alternative economy, hoarding. They're all buzz words that arouse vivid images and strong emotions. Perhaps the most powerful word of all, however, is "speculator." It sounds so irresponsible, opportunistic, and dangerous.

Politicians and the media throw the word speculator about so abusively, I suspect few people have ever dared to ask what one really is. A speculator is simply someone who sees or anticipates distortions in the marketplace and positions himself to take advantage of them. He can do that because he understands their causes and their effects.

Speculation will be the foundation of dynasties in the turbulent years ahead. The original Baron Rothschild knew how to profit from the politically created chaos of the French Revolution era. He became rich and famous by following his own advice to "buy when blood is running in the streets."

That doesn't mean the speculator is predatory; paradoxically, he's a humanitarian. When people are desperate to sell their possessions, he appears with cash--the very thing they want most. When they change their minds and clamor to buy those things back from him during good times, he once again graciously accedes to the desires of the majority. The speculator, like any other worker, tries to give his employers what they want. Value is subjective, and the price at which something voluntarily trades hands is exactly what it's worth at the time; the speculator simply gives value for value. If he wasn't there to buy, perhaps no one would be, and sellers would be really in trouble.

Somehow, speculators have gotten the image of careless gamblers charging about in wild, frenzied activity. It's a totally inaccurate image, at least where successful speculators are concerned. Good speculations are always low-risk speculations. Far from taking risks, speculators only go in for "sure things." They are rational and unemotional if they're successful; the irrational and emotional who like to gamble and take chances don't last long playing the game, and they soon become ex-speculators.

While simplistic, a useful way to view the methodology of the speculator vs. an investor is this:

An investor risks 100% of their money in the hopes of receiving a 10% gain. A speculator risks just 10% in anticipation of earning 100%.

If you are the least bit attentive, the longer-term risk/reward profile for the speculator is in an entirely different league than that of the "conservative" investor.

These days, while the chattering masses are frantically looking for safe harbors against the gathering storm, the speculator is accumulating positions in the quality gold companies. While gold is more in the news than it has been in years, the average investor still views it skeptically, thinking gold investors are somehow goofy.

As you'll read below, that makes this a nearly ideal time to load up, though buying aggressively early last year when few wanted to know about gold was better... a fact that the subscribers to our International Speculator will happily attest.

Investing for income is the kiss of financial death. Why haven't any of the great millionaires of the past taken advantage of the simple gimmick of compound interest to eventually take over the world? (If the Indians had invested their $26 for the sale of Manhattan for a 5% compounded return, their money would be worth $2,790,729,193 today). It isn't because they haven't tried, I'm sure. It's because no investment will give you a true 5 percent for even the length of a lifetime. In fact, there's probably nothing that can be relied upon to yield even 3 percent over more than forty or fifty years. You might comment, "What difference does that make? I'm not going to be here that long." But it does make a difference, because it shows the futility of trying to stay ahead in any type of "secure" investment. Everything is a speculation, whether people know it or not; those who settle for a low but "secure" return are penny-wise and pound-foolish in the most profound sense.

When you settle for a "conservative" return, even the slightest miscalculation, bad luck, or government fiat can wipe you out. Taxes will always erode your capital, directly or indirectly. Inflation, for the foreseeable future, is sure to get worse and fluctuate wildly as it does. Banks and insurance companies--the very institutions that have always gotten away with offering low yields because they were so stable--will fail as they always have... especially given the current overvaluation of most U.S. real estate and the underlying loans that are looking increasingly shaky.

The government itself will eventually be replaced and currency will become worthless. And there's no way to truly protect against the risks of war, theft, fraud, and natural disaster. Investing for income--especially in today's climate, when cracks can be seen in the foundations of society itself--is the height of stupidity.

If you invest for income, you're handing over responsibility for your future to others. You don't know what they're doing with your money, you can't know how intelligently they're going to conduct themselves in the future, and you don't even really know how sound their capital position is. That's a bad enough set of fundamentals for a madcap gamble, but in return for a simple yield, it's absurd.

What, then, to do? What is the method to overcome this madness? The only answer I know of is to lay a solid financial foundation, and then gather up your cash and your courage and learn the art of speculation.



[Doug has come up with a new pick, a small Canadian company sitting on the largest known gold deposit in all of China. Best of all, it's selling for pennies. Click here to learn more.] 

Posted 11-08-2005 2:56 AM by Doug Casey