I know some people whose entire investment portfolio consists solely of high-dividend-paying, large-cap stocks whose each 2% move should be celebrated like it's 1999. Sure, you'll probably sleep better at night knowing that your nest egg will most likely not decrease in value by more than 1% the next day, but who needs that type of security when it almost certainly means that your investments won't appreciate by more than 1% tomorrow either? Granted, if you're 60 years old and plan on retiring in a couple of years, or if you are planning on liquidating your portfolio for a life-altering purpose such as buying a house or paying your kids' college tuition, then by all means, purchase stock in General Electric, Kellogg, Pepsi, and Johnson & Johnson. But if you're like me -- still decades away from retirement and with no bank account-busting purchases on the horizon -- then a part of your stock portfolio should be devoted to speculation. But, first things first; what is speculation you ask? Investopedia defines it as, "The process of selecting investments with higher risk in order to profit from an anticipated price movement." In other words, it involves buying stock of companies that are as different from GE, K, PEP, and JNJ as you can find – companies who have little or no earnings, little or no revenues, have small market capitalizations, and are relatively unknown. The goal is obviously to purchase these securities now, while they’re still cheap, and before the general public gets a whiff of their potential future success. But for each such hidden gem you find, a dozen will turn out to be complete turds. Regardless, finding this one diamond in the rough should more than make up for the ones that turn out to be complete failures, and I’ve proven this to myself.
Around the year 2000, I made three notable speculative stock purchases pretty much at the same time. Two of these (a company named Infotopia, which engaged in sports-equipment infomercials, and a company named Universal Express, which attempts to ship your luggage so you don’t have to carry it onto an airplane) are now completely worthless, with the stock either completely delisted or trading at thousandths of a penny. The other (a company named Rentech, which is on the verge of producing diesel from coal), however, has since increased in price four to five times (trading as much as nine times higher at one point) since I bought it. Hence, the money lost with my two completely asinine picks was more than made up for with the lone winner. And, as I was still a very amateur trader at the time, all these purchases were accomplished almost completely randomly and with very little research. Moreover, all three of these stocks were “penny stocks” – those trading at or below $1 per share, having tiny market caps, and/or trading “over-the-counter” and not on actual trading exchanges. Imagine what my returns might have been had I put a little more effort into picking such speculative stocks, and avoided the very dangerous penny-stock sector!
By no means am I advocating a portfolio of solely speculative stocks; I’m simply insisting that most people should definitely not shun this segment altogether, and perhaps invest as much as a third of their monies in such well-researched, potential future winners. And, if one or two of your picks become completely worthless, one or two are bound to become multi-baggers (as they have for me), putting you very much in the black.
DISCLOSURE: The author of this article has a direct beneficial ownership of USXP and RTK, albeit the current market value of all his USXP shares is now barely enough to buy a US postage stamp. | |