Once in a while, I like a good burger. And as it’s ‘once in a while’ I’ll go all out. I’ll opt for the extra second patty. Bacon? Yup. Cheese? Load it on. And then finish it off with some red onion, maybe a jalapeño pepper or two, a slice of tomato and a piece of lettuce for colour, with fries on the side… and a Diet Coke, because you know… gotta watch those calories.
When it comes to what you eat, I don’t see anything wrong with the occasional guilty pleasure. And I think the same is true when it comes to investing. Similar to how your diet should be healthy 95 percent of the time, so too should your approach to investing.
But it’s the other 5 percent, the guilty pleasures, that I’m talking about today.
My “guilty pleasure” investment isn’t really an investment at all – it’s pure and unabashed speculation.
What’s the difference? You could argue the semantics of investment versus speculation all day long.
The godfather of value investing Benjamin Graham says, “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative”.
As for me, I view speculation as a high-risk buying strategy with an expectation that future events will drive more investors/speculators into the asset in the near future.
In reality, I’m just talking here about taking a big shameless swing of the bat. I’m hunting for a homerun. I’m looking for a 100 percent return, minimum… and fast.
Where do you find these opportunities?
Well, it’s a heck of a lot more complicated than a trip to Burger King. In my personal experience, the most valuable speculations have come from what you’d call ‘tips’.
To be clear, I’m not talking about trawling penny stock blogs or nosing around pump-and-dump online chat groups. And of course, I’m not talking about inside information. I’m talking about the ‘tips’ that emerge from a trusted network of folks.
Peter Churchouse – who you sometimes hear from here, and who writes The Churchouse Letter – knows a lot of these people. He’s been in Hong Kong working real estate and finance about as long as I’ve been alive. He has an extraordinarily deep and knowledgeable network, the insights of which you won’t read about in the press.
For example… in late 2011, I sat at my desk at JP Morgan – probably trying to structure the next great derivative product that nobody needed – when Peter called. He told me to pull up a little Singapore-listed stock on my Bloomberg terminal.
I’d never heard of it. It had a market capitalisation of less than US$60 million. The company wasn’t making much money. But when I checked out the news on the company, I saw that a new CEO had been appointed that morning. Both Peter and I knew him – I’ll call him John – well.
John was a proper master-of-the-universe big-swinging investment banker of impeccable pedigree. So the question was: Why was he taking the helm of this small-cap Singapore stock?
I knew two things: firstly, John wouldn’t take this job unless he was very confident in the company and its prospects. And secondly, this was a small-cap highly illiquid stock. This is advantageous to us as individual investors. Small-cap stocks are off the radar of institutional ‘smart’ money. They can’t accumulate a big enough position without bidding the stock up. So for the time being, the opportunity was just open to small fish like me.
This was a seriously greasy bacon-double-cheeseburger of a trade. It was speculation of the highest degree. (Although I’m not sure how much my friend John would appreciate me labelling it that!)
In this case, the CEO’s buy-in (that is, that he accepted the job) was all the research I needed. If John was in, I was in.
I got the necessary approval from my bank (then, and now, buying a stock if you work for a bank entails asking permission) and started buying. The stock was so illiquid – that is, so few shares were traded – that I was personally responsible for over half the day’s trading myself. But my position was small. It was only what I could afford to lose.
And then, over the course of the next 18 months, the stock returned nearly 1000 percent.
Always learn something – win or lose
Regardless of whether the trade ends up a 10-bagger or a donut (i.e., it falls to zero … I’ve had a couple of those in my time), I always learn something new when I take on these kinds of speculations. In this case, I ended up learning about an Asian country I knew very little about. I jumped on a plane to go and stay with the CEO, and spent some time at the company headquarters in a country I’d never been to. Peter did the same. (The CEO has since left the firm, and I’ve long since sold the stock.)