What Makes A Stock Idea Speculative?

Stock Idea Speculative

Avoid gambling on speculative stock ideas…

What Makes a Stock Idea Speculative? It’s a good question.

And depending on who you ask, how to determine the speculative nature of stock ideas, is an inquiry with a few different answers.

But let me help you out…

Here’s my rule of thumb for identifying what makes a stock idea speculative...

How To Determine What Makes A Stock Idea Speculative:

Speculative stock ideas are defined in a couple of ways. But no matter which definition of speculative stock tips you look at, there is one common element: risk. Makes sense, right?

Speculating on stocks is glorified gambling. And sitting at the blackjack table doesn’t come without risk. So let’s take a quick look at what it means to gamble.

Basically…

You’re putting your money on a hunch and hoping it pays off. Risky, right? But here’s the thing you need to watch out for:

In the modern investment landscape, their are so many data points, indicators and market prognosticators, that you can almost always convince yourself you’re right!

Avoiding the confirmation bias is a real challenge for investors today…

So how do you objectively determine if you’re speculating on stock ideas?

Well, you need objective criteria and a rigorous decision making process to evaluate the speculative nature of your equity and debenture holdings, before you pull the trigger and buy or sell your securities based on any of your stock ideas. Got it?

Now…

How To Ensure Your Investments Are Not Speculative:

The key rule of thumb to determining if your stock ideas is speculative in nature comes down to this: You need to look at the balance sheet and determine the assets per share.

When you buy stocks that are trading below their net asset per share (or even cash per share!) then you know you are not risking money. Rather, you are buying equity at a discount to true value. This sounds a little wild but bear with me for a second…

The stock market is a volatile, irratic place and speculative place! The blade swings cuts both ways…

So when equities fall out of favor with investors they are sometimes punished unduly. The recent fall in AAPL from $750+ share to $430 is exactly such an example. So where does that leave you?

I’m glad you asked.

Your job, as a savvy investor focused on protecting your wealth, is to look for stocks that are trading below their net asset value. Low P/E and high dividends may also make these issues more attractive.Of course…

You will also do enough research to understand WHY the stock is trading at such a discount, and avoid it if future earnings look impaired (in which case you’ll stay away). Now…

A lot of people won’t agree with this definition. But it’s the precept of value investing so I’m not alone. And if you invert the supposition (as the great Charlie Munger always says you must), then it’s intuitive: paying more than something is worth is speculative (because you’re relying on the greater fool).

So buying undervalued stocks is how to avoid speculative stock ideas. And paying more for stocks than they are fundamentally worth is what makes a stock idea speculative. Period.

Of course, determining exactly how to evaluate your stock ideas is a story for another day. But hopefully you’re starting in the right direction now, at least.

What stock idea speculations have you heard recently?

 

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