Midway through Doug Casey's new novel, Speculator, the protagonist explains his theory of investing: “He concluded that it made little sense to risk 100 percent of his capital on conservative investments that might give him a 10 percent return—if he was lucky. It made more sense to allocate 10 percent of his portfolio to speculations that could yield 1,000 percent gains.” While speculative investing may not be ideal for the masses, it does hold a very treasured place for individuals willing and able to cut against the traditional investment grain by staking their claim in potential.
Traditional investment management rarely mentions speculation. In fact, today's consensus leans towards a conservative diversified portfolio of indexes. The only major public debate is between pure index investing and an actively managed approach.
But speculation comes in many forms and has an important place in the investing universe. Angel investors in startup companies contribute capital as a form of speculation. Real estate developers speculate that this residential community will pan out or that commercial building will lease up. Mining companies speculate that a particular hole in the ground will prove economical. Individuals speculate that the stock suggested by their retail broker will pan out better than the general market.
Speculation contributes substantially to price discovery and capital formation. And each of these contribute to an efficient market. In this case, I am not talking about day-traders, high-frequency-traders, or those who bet by attempting to guess trends or charts, but rather those investing in companies or markets severely out of favor and with a high degree of uncertainty.
Speculation may work best when there is an uneven playing field. Not in the sense of trading insider information, but rather more knowledge about a topic than other investors. Academic research notes that in small company or fixed income investing one can gain an advantage doing detailed analyses on securities where few bother to do research. Speculators absorb and integrate information not in the daily news to attempt to gain an advantage.
This is where the hero of Speculator, Charles Knight, comes in. The novel follows the pathway of this young participant in a fictional mining stock. After making a little money early on, he decides to travel to Africa to assess the company more completely, and from there a multi-continental quest for what is right and wrong begins.
If you like action packed novels with characters drawn in ethically right and ethically wrong tones, this will certainly keep you enthralled.
Recently, I had the opportunity to sit down with author Doug Casey at his home in Cafayate, Argentina to talk about the book and why he turned to fiction after a best-selling career on the non-fiction shelves.
Speculation isn't for everyone and, in particular, isn't to be done with money that one needs to count on. There is substantial risk of loss. Over my many years around investors, I have known quite a few who follow the approach mentioned at the top of this article: take a smaller portion of a portfolio and use it to intelligently speculate. Since they were all telling me their story, it should come as little surprise that these were all stories of success. But surely there were others who lost it all or were forced to drop out.
I enjoyed the action, the characters and the ethical subscript of Speculator. If you are looking for a good read or a holiday gift, I speculate that you'll love the book. So go grab a copy and dive in.