While majority of the investment decision should primarily be based on the ground that it should be invested in companies that are generating consistent cash flow at realistic valuations, however this can become extremely dull and monotonous. Although it may be fine for other people, some consider it to be an element of excitement to the entire investment process. It follows that it traders are willing and can afford to take additional risks then it’s worth it.
Speculation, as compared to investing is betting on a company that really doesn’t have the necessary cash flow stream. Mining companies for example don’t have a clearly visible cash flow stream and so there is the sizable risk that they could go bankrupt or dilute shareholders to the point that each share is worth just a relatively small portion of the company.
The good news is that such companies are regarded as not as expensive in relation to their cash flow potential and that is if these companies find the cash flow streams then their valuations can surge to as many multiples of their current market capitalisations.
Speculation is just that they are betting primarily on something that isn’t really there and hence its considered as gambling. Similar to card counting, things are skewed into the cardholder’s favour and in effect can result in much more intelligent speculation.
1. Secure bets on people and not on stories
When speculating, it is actually considered betting that a company’s management will find a new cash flow stream that will profit shareholders. Any company can tell what a great story behind their success and will convince traders to deal with them by telling them that the same is on the verge of creating new technology that is going to change the industry forever.
One way of doing so is to look at the company’s management scheme. This is very important since if traders are betting on a drug company for example, they need to make sure that the top executives are putting all their capabilities and assets to their cause, specifically such members of the board should have a degree relative to the company’s niche. This can be done by checking up on management’s credentials and a good company should have short biographies of the top executives on its website.
2. Searching under the radar
Part of the speculation is finding companies before the bigger market take cognisance of them. Chances are the company has been discovered and examined and it follows that they probably are left unnoticed because of a lack of advantage. A good way to move about is looking for smaller companies that are not traded very often. This can be done by looking through newsletters and website that specialise in the sort of company that would be compatible to the needs of the trader.
3. Be the aggressive expert
When traders speculate they should not be complacent about it. If they want to speculate in a small mineral exploration company, then they need to read up on mineral exploration. Should they resort to doing so, they will be better equipped to find that there is a subtle difference between companies that amateurs would miss out and this is how they should go about in finding the best company before the market does.
Finally, becoming an expert requires restriction of speculation to one or two sectors. They should not speculate across a vast industry since the chances of spreading thin and losing their edge is very likely to happen.