When you think about speculating in the stock market, everyone wants the same thing: the biggest capital gain in the shortest amount of time. Of course, if it were easy to be a consistent stock picking winner, everyone would be doing it.
I like to approach stock market speculation the same way I would create a portfolio of big-cap companies—by building a handful of holdings. For speculating, I would allocate a certain amount of dollars to the endeavor and slowly build three to five positions, as the opportunities present themselves. And, like a large-cap stock market portfolio, I would be diversified. I wouldn’t put all the money into just one story. Perhaps you might own a couple of mining stocks, a biotech company, and an IT firm. You’ve got to spread it around a bit, because stock picking is mostly a losing game. I’ve said this before and I’ll say it again: at any given time, there are actually very few, if any, really attractive stocks to buy with conviction. You should never be in a rush to go stock picking. There is no urgency in the stock market. Urgency only comes from someone who is trying to sell you something.
In my experience, there’s nothing like a great junior gold miner as a potential focus for the speculator. Mining is an event-driven business (just like biotechnology), but if drilling results score, so do investors. (See The Stock Market’s Next Best Trade Is Shaping up.) Like all resource speculation, the returns are magnified if the underlying commodity is experiencing a bull market. For the most part, good opportunities in the stock market tend to occur in waves. Successful stock picking has its own business cycle and the trend is most definitely your friend. At one point, all your investments could be doing well, and the next, there’s nothing.
The stock market is a secondary market (meaning the real owners have already sold their shares) for the systematic speculation of a company’s business prospects. All factors come into play and even the best enterprise with the best story to tell can go down in value on the stock market. This is why being consistently successful at stock picking is so difficult. You can’t judge what the rest of the stock market is going to do after you take on your position. You can only speculate as to how other investors are going to react to the corporate news that develops.
I’ve also learned that you can’t just have one strategy for successful stock picking. Like any Main Street business, you have to do what works and give the marketplace what it wants. This means changing your business plan as stock market conditions vary.
Right now we’re in an environment of perpetual uncertainty, more so than usual. Stock picking now is fraught with higher-than-usual investment risk, because the consequences are so great. For example, the sovereign debt crisis could break the euro currency at any time, causing massive destabilization of capital and currency markets. As a short-term speculator and longer-term investor, your investment strategy and stock picking have to change with the times, reflecting the risks and potential returns that the secondary market has to offer. That’s why, in this environment, I think it will pay to expect the whole global economic system to come apart. I’m certain about one thing in the investment business now—investment risk is a greater determinant than potential return.