Speculation is an ugly word. It connotes the worst association of gambling in the casino as opposed to value investing. But that’s a moot point.
Speculators do the opposite of hedgers. The former takes on a directional trade to increase risk in the hope of making profit. Hedgers on the other hand hedge to reduce the risk of losses through futures/options and are non-directional since it is simultaneously long and short. A caveat though that hedge positions may exacerbate the losses as the positions may not always work. The risk of price variability is thus effectively transferred from hedger to speculator.
Before you dismiss this article as at odds with value investing, I recommend that you read Cramer’s book to gain another perspective. Jim Cramer encourages devoting a small part of your portfolio in speculation.
Cramer breaks down the fundamentals of his investment approach, built on the twin principles of diversification and speculation: While most of your portfolio should contain reliables like oil, financials and blue-chip companies, 20% percent of your money should go toward a slightly riskier bet on a company's future ("owning a stock is a bet on the future, not the past"). (copied verbatim)
I propose not to have a tightly corseted mind and seek moderation in all things.
I will leave the reader to mull on the quote from "Reminiscences of a Stock Operator" by Edwin Lefevre, “Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.” Just like derivatives, speculation can only be risky if one involves in reckless behavior. The tulip mania is one prime example of excessive, reckless consequences of speculation.
Speculators do the opposite of hedgers. The former takes on a directional trade to increase risk in the hope of making profit. Hedgers on the other hand hedge to reduce the risk of losses through futures/options and are non-directional since it is simultaneously long and short. A caveat though that hedge positions may exacerbate the losses as the positions may not always work. The risk of price variability is thus effectively transferred from hedger to speculator.
Before you dismiss this article as at odds with value investing, I recommend that you read Cramer’s book to gain another perspective. Jim Cramer encourages devoting a small part of your portfolio in speculation.
Cramer breaks down the fundamentals of his investment approach, built on the twin principles of diversification and speculation: While most of your portfolio should contain reliables like oil, financials and blue-chip companies, 20% percent of your money should go toward a slightly riskier bet on a company's future ("owning a stock is a bet on the future, not the past"). (copied verbatim)
I propose not to have a tightly corseted mind and seek moderation in all things.
I will leave the reader to mull on the quote from "Reminiscences of a Stock Operator" by Edwin Lefevre, “Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.” Just like derivatives, speculation can only be risky if one involves in reckless behavior. The tulip mania is one prime example of excessive, reckless consequences of speculation.
