How Speculative Investing Brought Me Closer to FI

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6 min read. Financial Independence, Investing, Personal.

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With the recent cryptocurrency craze, housing market recovery and stock growth everywhere, it can seem like every investment out there is going up. Even in my recent Q4 Investment Report, my little bit of speculative assets started at 4% of my portfolio and are now up to almost 13%.

Even The New York Times is writing about how Everyone Is Getting Hilariously Rich and You’re Not, which can make it can seem like you’ve missed the boat. These shortcuts sound exciting but are more often than not fads that will hurt your progress long-term. This post is about how I personally pick which “speculative” assets I include in my portfolio.

Speculation is a dangerous game. To me, speculation is anything that’s not a well-diversified investment in a major diversified asset category: US Stocks, Bonds, or International.

In my personal portfolio, I too invest in some speculative assets. I limit the amount to 5% of my total portfolio – a small enough percentage that if I’m wrong I’ll still be alright. This 5% usually will go into stocks, and only recently into cryptocurrencies, but the idea is that it’s something I think will grow significantly.

My Rules for Speculative Investing

I am not smarter than Wall Street, and unless you’re Warren Buffet chances are you aren’t either. This is why I limit this to 5% of my portfolio. I choose investments here that pass this test:

  • Could this become the category leader?
  • Is there a lot of room to grow in the category it’s in?
  • Do I love it?
  • Am I an early adopter?
  • Do I want to use this for the next decade?

Investing in this way is very much making a bet. You’re betting that an investment will grow and perform. The companies that I favor are ones that I want to use for a long time from now. Every day there are new cryptocurrencies coming out, but I there is no way they meet these conditions for me. Who knows – maybe they do for you.

A number of companies have met these conditions for me. Some of them I decided to invest in, but most were before I gave myself a 5% allocation to invest. For example, I used the Netflix DVD service for years before they made the switch to online. If I were more aware of the above questions at the time, I might’ve looked into making an investment.

Every year there are investments that take off and surpass all expectations. Some of these become household names, while others quickly fall as their fad passes. How you handle these fads says a lot about your investing style.

Past Years Strong Companies

Fads are for more than just fashion. In the investing world, there are breakout investments each year that meet my criteria for speculative investing. Here’s a look at some of the recent ones in the past 10 years:

2017:  Bitcoin +1,272%, Ethereum +9,513%

2016: Nvidia 155% (Cryptocurrencies and VR)

2015: Amazon +163%

2014: Southwest +110%

2013: Netflix +180%, Tesla +368%

2012: Bank of American +115% (Housing Recovery)

2011: Humana +64% (Affordable Care Act)

2010: Chipotle +135%

2009: Lulumeon +320%, Imax +207% (Avatar Release)

All of these numbers are insane. Cryptocurrencies are the extreme outlier, but all of these other companies would have been terrific investments as well. Choosing to invest in any of them before they took off would have been a much more profitable investment than the market for that year.

I choose these specific companies and investments not because they were always the highest performing of the year, but because they’re likely companies that you’ve heard about.

Most of these (maybe except Humana) meet the speculative rules above before their large jump. Remember movies before Imax? Or online streaming before Netflix? These were market leaders, and if you were a user of them before the world, you might have known they were going to be big – or wanted them to be.

Don’t Chase Investments

A few years ago I read a book about speculative investing that stuck with me. It focused on the idea that there may be times in your life where you find and use a product, service, app, or whatever way before everyone else. These are the times when you’re an early adopter and are in a position to know more about how the product makes you feel than investors who are looking at the bottom line.

I took this to heart and it’s become the backbone of my speculative investing strategy. Rather than hunting for stocks and reading financial news on movers and shakers, I keep my eyes and ears open to things people are talking about (or won’t shut up about).

How I Find Speculative Investments

As an example, a few years ago everyone I know was talking about CrossFit. Friends that hadn’t ever worked out started going, and I took got caught up in the craze (I still am I suppose). Knowing how it made me feel, I started to look into ways that I could invest in CrossFit. It turns out no companies fit the bill. Rogue Fitness would’ve been closest, but as a private company, they weren’t an option.

IMAX

Another example would be IMAX. Back in the early 2000’s movies started coming out in IMAX. We were lucky enough to have a full-size theater in Orlando (Pointe Orlando!) that was showing these. We’d constantly check to see what new movies were going to be shown in this format and plan to see them there.

I still get butterflies thinking of the scenes from The Dark Knight where the camera pans over the side of a building. Seeing that was the closest experience to flight I’d experienced in a theater. Unfortunately, I didn’t make the connection at the time and didn’t invest in IMAX.

Southwest Airlines

Southwest Airlines has a cult following. They’re my goto airline when flying domestically. From the reasonable prices to the great customer service, to the ease of using points, to the hilarious comments over the intercom by flight attendants – they’re doing a lot right.

If you discovered Southwest Airlines years and years ago, and felt they were far above most other airlines, then that’d be a great opportunity to look more into the company and make sure their finances matched that feeling.

When I found Southwest, they stock had already had years of amazing growth, and I realized too many people already knew how great they were. Unfortunately I still invested in them, and that stock went down slightly. It helped me better identify what it means to be an “early adopter”.

Be on the Lookout

I’m always on the lookout for what my next speculative investment will be. In the last 10 years I’ve invested in Apple, Tesla, Southwest, Netflix – all never investing more than 5% of my portfolio. What I’ve learned from these investments was that when I picked investments only because they were going up I tended to do a lot worse. If they were going up, that meant my knowledge of the company wasn’t special. The better option was to find companies I loved that hadn’t yet taken off, but were positioned to. The good news is that there are new companies that meet this criterion every year!

So why is this important now?

With the current Bitcoin and cryptocurrency craze, I’ve been asked by a number of people if they should “invest” in them. I return to the same 5 questions as before:

  • Could this become the category leader?
  • Is there a lot of room to grow in the category it’s in?
  • Do I love it?
  • Am I an early adopter?
  • Do I want to use this for the next decade?

If you can answer these with a resounding yes, then it’s worth looking deeper into the financials to see if investing makes financial sense. That’s a much larger subject, but just finding investments to be excited is the first step.

What Am I Excited About Now?

While many are geeking out about the blockchain, that’s something I’m more interested in as an end user. Whenever we travel abroad, needing to learn and convert to local currencies takes up time. What interests me about cryptocurrencies is the idea that I could wander around the world and use the same wallet without borders. This is where things could go in the next decade with the right tooling to make adoption super simple. I have no idea if this will happen, but I’d love to see it evolve.

As far as other companies go, there are no specific companies I absolutely love that meet the above criteria – which is why there are no other specific companies I’m invested in. I really like my Alexa, and I’m curious what will happen in that space – potentially shaken up by systems that better integrate with others via AI (ex: “Alexa, have someone come by and fix my garage door on Thursday”). The VR demos I’ve tried have always left me wowed, but they’ve been just that — demos. The demos I’ve seen aren’t “The Dark Knight”, but more of Adam West Batman. I can see that becoming the category leader in gaming someday – but many years from now.

I’m always excited to hear what others are thinking about the future. Andreessen Horowitz, the stellar venture capital fund that has invested in many companies such as AirBnb, Coinbase, Facebook, GitHub, Lyft, Slack, Twitter and more, put out a great video looking into the future that is worth watching.

I’m always on the lookout for new speculative investments. Even if I go years without finding something that meets my criteria it’s better to lay waiting for the right investment than to force yourself into a bad one.

What products, services, companies do you think meet these criteria? Would you invest in them?

Comments (12)

  1. I really dig your smell test for speculative investments. I will definitely be incorporating a few of your tests.

    Thank you for sharing your thoughts on this topic, I enjoyed reading.

  2. Great post! It seems like you have the right idea to keep speculating to 5% or less of your portfolio. It makes me cringe to think about all the people that threw their life savings into Bitcoin after things started really taking off. If you’re investing in something after it’s already getting big, you probably already missed the boat.

  3. I think this is smart. If I had a followed a similar strategy, I would have got conservatively got into Bitcoin back in 2015 when I was considering it, but I was scared away because it wasn’t the traditional Vanguard Index Fund philosophy that is popular in the FIRE world. Of course, hindsight is 20/20. 🙂

    I have done a bit of individual stock picking with industries I know well, and I beat the market, so I think if done right (like with all the examples you pointed out), it can be a fun and profitable thing.

    1. Thanks Jon! I know what you mean about btc in 2015. I was investing in Tesla then as my speculative asset, which meant, per my rules, I couldn’t invest in btc. Good to get out of speculative assets at the right time too!

  4. Glad to see someone standing up for a portion of risky investments in your portfolio! 5-10 percent of speculative investments is only about a year off your FI time if you lose your entire investment/are looking for a 10 year retirement horizon.

    I come under fire (no pun!) so much when yes, losing the entirety of my speculative investment wouldn’t be the end of the world.

    1. Thanks! It’s a tough recommendation to make. Everyone’s experience and vetting process for these will be different. To my this is much less risky than investing in real estate, but I know people who do amazingly well at it. I like the research more than the day-to-day, which lends better to speculative investing than landlordong and property management.

    1. For a while I was investing a small portion of my paycheck each time until I had invested a total of 5% of my portfolio into Speculative assets. After that I went back to investing my paycheck in the usual mix (total stock market, total intl, total bond). I don’t plan to buy anymore crypto now though, since it’s something like 12% of my portfolio. Once I sell a bunch and I’m down to understand 5% I’ll figure out if that means investing in crypto (unlikely) or being on the lookout for the next company that I think has a chance to jump.

  5. I have a similar strategy. Since 2004, I have engaged in speculative investing with limited funds. In 2004, I bought a little Nexflix. In 2005, Sam Adams. In 2006, Google. In 2013, Tesla. In 2014, Amazon. This strategy has worked out quite well. However, I would never suggest speculating in crypto currencies. This is simply the next tulip bubble waiting to burst. I have been successful because I invest in companies that make compelling products of value. Cryptos don’t. Yes, crypto software is useful, however it is not a product, at least not yet. Block chain is the future but the wild crypto speculation will not last. The winners in the crypto space are yet to be determined. Sound voices will prevail. See MMM or Buffet on the topic. Exit now.

    1. Thanks for your comment isip! I like that you have that personal rule on investing in companies that make things. Seems like it’s definitely paid off by spotting some companies at great times.

      On the crypto side, it’s such a hot topic right now. I’d agree on the “winners of crypto are yet to be determined” statement for sure. I’ll be curious where it goes in a few years – but I don’t think I’ll be in it then either.

  6. Speaking of exit now, if your Crypto has put you up to 12% of you total investments, the classic thing to do is to sell to put it back down to 5%. It guarantees you buy low and sell high.

    1. Yeaah, I think I really should’ve done this when it was at its height. Now that it’s lost 50% of it’s value, it’s back down to ~6% of my portfolio. I was hesitant to sell due to tax reasons – mainly because I’m so used to being a buy and hold investor. I think this was a good lesson (albeit a hard one) in being OK to sell things in my “speculative asset” category when there are gains.

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