The Art of Speculation

Philip Carret's definition of speculation as an art inspires Amazon acquisition

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May 05, 2016
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Philip L. Carret lived from 1896 to 1998, and, according to Warren Buffett (Trades, Portfolio), he had "the best long-term investment record of anyone I know."

Carret wrote the "Art of Speculation" that was published in 1930; through it, I learned there is an art to speculation that one of the greatest investors of all time used to his advantage to amass incredible returns over the course of his career.

I thought his definition of speculation was wise when he asked in his book, “What is speculation? In fact, speculation is inseparable from investment. The investor must assume some degree of speculative risk; the intelligent investor will seek a certain measure of speculative profit. If he has the time, the temperament, the ability, the investor may go a step further and seek speculative profit in preference to dividend and interest from his capital.”

This quote taught me that speculation is an art that is intertwined with intuition; it further strengthened my confidence in trusting my instincts in life, especially while investing.

The quote inspired me to buy a stake in Amazon (AMZN, Financial) using my own art of speculation. Last weekend at the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual meeting, Buffett mentioned Amazon numerous times saying he liked Amazon's founder and CEO, Jeff Bezos. He also believes the company has tremendous growth potential over the next 25 to 30 years.

I read "The Everything Store" about Bezos' life a few months ago, and I learned he is relentless. If you type in www.relentless.com in Google, you will be redirected to Amazon. His relentless approach to business combined with his incredible ability to execute his ideas gives him a tremendous differentiation advantage in the global specialty retail industry. Bezos built Amazon from scratch, increasing the market cap to $316.55 billion, an outstanding accomplishment for a company that began operations just over two decades ago on July 5, 1994.

Amazon expects to implement "We're excited about Prime Air" in the near future. Prime Air is a future delivery system from Amazon designed to safely get packages to customers in 30 minutes or less using small unmanned aerial vehicles, also called drones. Prime Air has great potential to enhance the services that Amazon already provides to millions of customers via rapid parcel delivery that will also increase the overall safety and efficiency of the transportation system.

I have confidence and faith that Bezos will use his relentless tactics and successfully implement drones as a method of delivery for the company in the future. This will drastically reduce costs of shipping, while creating increased revenues and profits for the company once Prime Air is successfully implemented.

Carret recommended that an investor should own at least 10 stocks in five different industries. He explained that this reduces the variance of losing money if something goes wrong. Carret then described the importance of having a large margin of safety when investing in securities.

Having a large margin of safety reduces the variance of losing money due to variance or fluctuation in the market, in case the unknown happens or variance and volatility sets in. He wrote about this in his book.

“The speculator must allow a considerable margin for the unknown, even in the case of companies which make frequent reports of their condition and make an honest attempt to keep their stockholders and the public fully informed regarding their affairs. By sufficient diversification these unknown factors affecting individual securities cancel each other. The loss which is due to the unknown factor in one case will be counterbalanced by an unexpectedly large profit in another.”

Carret gives the basic fundamentals of how to be a successful investor while using speculation as a form of art. I would highly recommend this book by one of the greatest investors of all time.

Cheers to your investment success.