The Speculator’s “Check Ride”

Last week, I asked: how often do you check your portfolio?

I showed you a study that found the more often you check, the higher chance you have of losing money.

Checking often can lead to making rash decisions. Like selling too early. Or buying too late.

But even if you get the timing right, money isn’t made in the buying. It’s not even made in the selling. It’s made in the waiting.

That waiting is the hardest part.

So I introduced the Investor’s “Check Ride” as a way to combat that.

But as I explained last week, there’s a huge difference between your true investments and speculations.

Your serious money should make up the core of your portfolio. It’s not for play. It’s where you look to compound your wealth over years…or decades.

A speculation is something different.

When you speculate in the markets, you’re looking to turn dimes into dollars in a very short period of time. I’m talking anywhere from months to maybe a couple years.

In fact, it’s something I’ve done many times both personally and for premium members of Strategic Trader over the years using warrants.

For example, Purple Innovations, which I recommended to readers of Strategic Trader. After about 20 months, we sold the position for a near 5,000% gain.

But let’s be clear: Speculating isn’t for the faint of heart. Because even though you can bag some massive wins in the short term, you’ll almost certainly have losses. No one—not even me—has a perfect track record when it comes to speculating.

Which is why you need to have a way to control your risk and more closely manage each position so that you don’t lose your shirt.

Speculating is more like gambling. Except if you have the right mindset and the right tools, there’s no house advantage. You’re fully in control of what happens to the speculative side of your portfolio.

No big speculative win I’ve ever had happened without having the right strategy and mindset in place.

The whole point of speculating is to try and juice your returns year after year without betting the farm. What I mean by this is that your speculative portfolio shouldn’t give you any stress . . . if you do it right.

The problem I find is that everyone’s looking for a get-rich-quick scheme. They see other people on social media flaunting their wealth and how they made thousands or millions of dollars in the latest fad. Like some crypto coin you’ve never heard of.

Some of you may remember the non-fungible token (NFT) craze several years ago, where people bought digital images of things like apes and sold them to the next willing buyer—or sucker—for hundreds of thousands of dollars. Only to see the price collapse like a boulder rolling down a mountain.

Like the Bored Ape Yacht Club. At its peak, well-known Bored Ape Yacht Club NFTs sold for nearly $370,000.

Within a couple months after the peak, prices collapsed 76%. And within a few years, they were down more than 90%.

It was like a modern-day South Sea Bubble—a speculative event that even bankrupted Isaac Newton.

But that’s just one case of speculative excess. The reality is, throughout history, people tend to chase newfound riches. They get wide-eyed as early speculators cash out. They rush to go all-in on the fad of the day. Then they wipe out when it all collapses.

Stories of these dramatic speculator rise-and-fall patterns fill history books.

Which is why, as a speculator, you need a different mindset and a different system in order to succeed over the long run.

When it comes to speculating, most people have it backwards. They tend to look at the returns when instead, they should focus on risk first. That’s how you get ahead and put yourself in a position to have a chance at 50x gains.

Controlling risk when speculating isn’t as difficult as you think. The first thing I do when I find something I want to speculate on is set a limit on how much I buy. The amount you risk is your control mechanism. It keeps you from overdoing it.

Say you have a portfolio worth $200,000. Setting aside $10,000 for speculations—or 5%—is a figure that won’t necessarily hurt your overall performance if you lose it all. But it can make a huge difference if it ends up doubling or more.

But from that $10,000, you spread your risk even further. You might limit each position to no more than $500.

Keep in mind that how much you speculate with in total and on each bet will be different for everyone. It may be $100 for some. It may be $5,000 for others. It’s about the percentage exposed, not the dollar amount. That’s different for each individual.

The goal is to bet what you can comfortably afford to lose so you can sleep easy at night.

What you’re looking to do is make small bets and look for big payoffs. Then you sit on your hands, be patient, and wait.

Along the way, however, you control your risk even more by peeling off some profit when a speculation rockets higher.

My favorite strategy for doing that is selling enough of a position to recover my initial stake after it doubles or more. Meaning if I bet $500 and that trade goes to $1,000 or more, I’d sell $500 worth to take all of my initial capital off the table.

It’s a free ride on more upside. Meaning it’s pure profit. It’s a sort of foolproof way to manage risk in highly volatile stocks.

Now, with that risk management foundation in place, that brings us to the Speculator’s “Check Ride.”

When it comes to your speculative portfolio though, you’ll want to conduct a “check ride” more often than with your investment portfolio. That’s in part because you’re holding these positions for much shorter periods of time. And in part because they’re far more volatile.

So you may go through this list about once a quarter instead of once a year.

Ultimately, when I go through it, I’m usually looking for the following:

1.       What is the state of each position in my portfolio?

a. Are there any positions where I should take a free ride?

                          i.      If yes, sell enough to recover my initial stake.

2.       Are there any positions where I should take a loss?

a.   If probable, what are the reasons why I should take a loss?

3.       Is it a matter of running out of time (i.e., options)?

a.   If yes, sell and move on.

4.       Is it a matter of something fundamental/structural?

a.   If yes, sell and move on.

5.       What is my overall return since the previous “check ride”?

a.   Check my win–loss ratio. (This is the ratio of any trades where you’ve either sold or taken a free ride. Any free ride or profit you mark as a win. It’s not unlike a batting average. You take your wins and divide them by your total trades. If you’re above 0.500, you’re probably doing well. My personal ratio is north of 0.640.)

6.       Do I need to adjust the amount I put into each speculation?

a.   Should I increase or decrease that amount?

b.   If I need to decrease my bet size, by how much should I adjust it?

c.    Is it in the type of bet I’m making?

7.       Am I betting too much on companies with little or no real business?

8.       How many trades did I make during the period?

a.   Am I trading too much or staying patient?

9.       Are my emotions creeping into the decision-making process when trading?

Again, these aren’t hard-and-fast rules or questions. The only real way to know what you need for your specific situation is through experience. Something that will only come with time. And a lot of patience.

The point of all of this is twofold. First, if you want to have success investing or speculating, you have to have a system in place that helps you overcome what most investors and speculators fall victim to.

You have to be able to avoid the temptation to check in on your portfolio every hour of every day. Something that ultimately leads to more emotional decisions, overtrading, and a greater chance of loss.

And it’s not hard. There are numerous other things you could do. Like hit the golf course. Go for a run. Or even just go to the local coffee shop and strike up a conversation with your neighbor. You never know who you’ll meet.

At the same time, this is where the “check ride” comes into play. What I’ve found over the years is this skill greatly improved my ability to think clearly when making investment decisions. And it helped me improve my performance by going through the motions of the system both for my investment portfolio and speculative portfolio.

Second, you have to constantly practice proper risk management, especially if you want to have any real success speculating over the long term.

With those two things in place, you’ll be in a much better position to cash in.

Regards,

Editor, Strategic Trader