Interesting in investing in speculative investments like Bitcoin without losing lots of money? You're not alone. With Bitcoin and other speculative investments reaching all-time highs, everybody is feeling investing FOMO and wanting to get rich quick.
In late 1999 I had my Bitcoin moment. I was a 22 year old first year analyst working on the international trading floor at a major investment bank. The internet boom was peaking and I had just gotten my year end stub bonus of $20,000. Although the $20,000 magically turned into $12,000 after paying New York City taxes, for the first time in my life I no longer felt poor.
I took $3,000 of my bonus proceeds and invested in a company called Vertical Computer Systems Inc (VCSY). I didn't know much about it. All I remember was that it was a China internet play with a telephone dial pad as its home page. I was on the Emerging Markets team and spent all my time looking at Asian and Eastern European companies. Surely, VCSY was going to be the next Yahoo!
In a couple weeks, VCSY went from around $3 to $6. It had an inexplicable 20-for-1 stock split and then went up to around $9. In other words, within six months it went from $3 to $180 pre-split and I had 1,000 shares.
The stock’s 6,000% move was ridiculous as everybody I knew on the Street started piling into the name. I eventually got out of the stock at around $156 a share, netting a cool $153,000.
Realizing VCSY was 95% luck and 5% being in the right place at the right time, I sat on the cash for a couple years, watching the NASDAQ implode before finally getting the guts to use all my after-tax proceeds to buy a $580,000 condo in San Francisco with a $464,000 mortgage in 2003.
Hesitant To Invest
In retrospect, I should have kept hunting for new investment ideas like VCSY's every year. However, while my wealth continued to grow, I was too afraid to lose even small amounts of money. I didn't yet have these strategies for investing in uncertain times.
The dotcom crash had scarred my investing psyche. I personally knew many people who lost both their jobs and their paper fortunes. The subsequent housing bubble crash was even more devastating because so many more people were affected.
I wished there was a system I could follow that would give me the confidence to consistently swing for the fences without losing my shirt.
Invest In Speculative Investments Without Losing Everything
We know we can get rich by gaining Maximum Exposure to risk assets in a bull market. We also know we can get rich by building a business where we own all the equity. The downside with leveraging up to buy property and stocks or forsaking a steady paycheck to start a company is the potential to lose A LOT of money and time.
Many Bitcoin investors sure took a hit they never saw coming. And they weren't the first. But, what if there was a way to strike it rich without taking any risk? I never really thought about this possibility until a reader brought it up. Previously, I've always just allocated between 5% – 10% of my investable assets and swung for the fences.
Utilize Your Risk-Free Investment Income
Here's what DoneAt53 wrote to another reader who is worried about current market valuations:
Start going to cash. Find a long term CD that pays 2.5% or toss money into savings bonds. With the proceeds buy S&P500 options. With 100K, you can use the $2,500 – $4,000 interest, depending on your risk free choice to purchase Dec 2018 265 options for 1400 each. Two will cost you $2,800 and you’ll have a 53% participation ratio, buy a third for a total of $4,200 and sell 2, Dec 2018 295’s for $200 credit each. You’ll have a 78% participation ratio up to 295 (11%) and 26% participation ratio above that and it will cost $3800 of your interest.
If the market tanks, you lost the interest on your money and very little of if any of the principle. If Mr. Market keeps going up, you get a nice percentage of the gain designed at your comfort level with (almost) none of the risk.
Understanding the options jargon is less important than understanding this concept:
With your risk-free investment income, invest in the most speculative investments that have the potential to give you the highest returns. Even if you lose your entire investment, you will never go to the poor house because you will never lose principal.
Examples Of Speculative Investments
- DoneAt53 discusses buying out-of-the-money options that provide higher returns on a specific stock or index versus buying the actual stock or index. The downside is that if your options expire out of the money, they are worthless.
- Cryptocurrencies like Bitcoin, Ethereum, and Litecoin are the hottest speculative investments at the moment and finally attracting mainstream capital. Bitcoin could easily collapse by 80% next week. But Bitcoin could also continue to go up multiple times because of a surge in liquidity and world-wide adoption. You can buy your slice of Bitcoin on an exchange like Coinbase.com.
- Internet and tech stocks in emerging markets. Buying the Googles, Facebooks, Ubers, Apples, of XYZ emerging markets is a straightforward investment thesis. Buying the next “Yahoo of China” was my investment thesis in 1999 when I bought VCSY. I continued this thought process in 2013 when I wrote, Should I Buy Chinese Stocks? Sina, Baidu, and RenRen have all done really well since.
- Angel investing where you provide seed stage capital is another way to earn massive returns. The problem with angel investing is that companies often have a minimum of $25,000 – $100,000. That's unaffordable for most people, especially if you need to make $25,000- $100,000 in risk-free income. I'm no longer angel investing partly because of bad experiences. But if the minimums come down, I might do so again.
- The crappiest small cap IPO that has gotten bludgeoned since going public for whatever reason. One example is Blue Apron that IPOed at $10 and fell all the way down to $2.97/share. I decided to pick $10,400 worth up at $3.15 a share. They found a new CEO, lowered guidance, and fired a bunch of people since. The bar is low now and the stock shot up to $4.15 at one point. I hope they get bought out.
More Examples
Another example is Snapchat. It went IPO at $17, got foolishly hyped up to $27/share and then disappointed repeatedly in its quarterly results and fell to $12 a share. The problem with my SNAP purchase at $12.24 is that even at current levels, it's still valued at $18 billion. It's harder to move rapidly or get purchased for a large premium when the company is already huge.
A crap IPO I missed was Funko (FNKO), a maker of toys. They priced the stock at $12, gapped up to $19.93 and closed that week at $7, all before reporting results. Then the stock rebounded 40%. You've really got to pay attention if you want to capture such opportunities.
- Original works of art from unknown artists who you think have the potential to go mainstream. If they don't go mainstream, at least you can enjoy the work. Or you could invest in fractional shares of art through a platform like Master Works.
Speculative Investing Framework Example
To provide clarity, I've created a Speculative Investing Framework. If you want to invest in Bitcoin and the like, this framework can help. The person below has $650,000 of low-risk capital returning $28,000 a year, or 4.3%. He proceeds to invest $28,000 in various speculative investments with a potential return of -75% to +625%.
The example has several assumptions that should be noted:
- The low risk income is not required for survival,
- Rental income may or may not be considered low risk,
- The time frame for the potential returns is unknown or up to the investor to decide,
- To deploy such a strategy, you must save aggressively and stop spending like a knucklehead, and
- It's up to you to figure out what else beyond CDs and muni bonds are considered low risk and invest accordingly.
Even if this person loses his entire $28,000 of low risk income in speculative investments, he'll be fine. The key is to not get carried away by cutting into principal, much like a gambler does when he pulls out his wallet or goes to the ATM machine for more cash.
For those of you who think this framework is only for financially independent people, it's not. You're overly focused on the dollar amounts, and not the framework. Besides, when you are not financially independent, it's better to invest with less money and learn from your mistakes.
It's Hard To Get Rich Quickly Investing In An Index Fund
Although earning a high teens return on your S&P 500 index fund is good in a bull market, it's a relatively slow way to earn a fortune since the stock market averages around 8% – 9% a year long term. After all, one of my mottos is achieving financial freedom sooner, rather than later.
If you want to get rich quicker, it's worth carving out 5% – 10% of your investable assets and/or reinvesting your risk-free income into speculative investments that complement your plain vanilla investments each year.
Just make sure your high risk capital is capital you can afford to lose, because you will lose quite often. Also make sure you have a comfortable cash buffer to provide for you and your family in case Armageddon strikes again.
Because I hate losing money, I decided to invest time in my 30s building a lifestyle business. I figured worst case, I'd become a better communicator and learn something about the online publishing world. I knew I would not regret putting in an extra effort while I still had the energy.
The Value Of Time Vs Money
My problem now is that in my 40s, I hit an inflection point where time is much more valuable than money. The desire for more time is why I'm happily farming out my capital to people who spend their careers looking at investments.
For example, I'm investing in eReits with Fundrise and in private venture debt funds. It's the same reason why I'm highly amenable to hiring a property manager the next time my tenants give me hell.
If you are lucky enough to strike it rich with a speculative investment like Bitcoin, do your best to turn the funny money into a real asset that generates stable cash flow. If not, use some or all of your lucky winnings to pay for a better life.
Barring a natural disaster, the $580,000 property I bought in 2003 with my VCSY money will still be there generating $4,000+/month in rent indefinitely. And if not, maybe I'll turn it into the Financial Samurai office or have my parents or sister live in it for free one day.
Remember: You only need to get rich once! Turn your lucky break into a gift that keeps on giving.
Related posts:
Investment Ideas At The Top Of The Market
The Canadian Housing Bubble Is Huge
Readers, have you ever invested in Bitcoin or other speculative investments? What method did you use to determine how much to invest?
Please beware there are many fake bitcoin mining/clouding out there, I got scammed twice before I met a hacker who helped retrieve my bitcoin. The whole plan was so smooth I could not doubt it. Bitcoin is actually a great investment option but one thing I discovered over time is that it is not possible to mine bitcoin so don’t be deceived. I invested 35BTC on a particular website called bitcoincloudminer, I monitored the profit yielding but got locked out of the account before I could withdraw. I went online and met this recovery expert fightingscams at aol dot com who helped me retrieve my bitcoins back in few hours. You saved my life and I will forever be grateful. I referred my friends whom we got scammed together right away and they got help too. You can contact fightingscams at Aol dot com. Thank me later!
Very good points. I have been playing around with speculative investments as well. Over the past two or three years, I’ve played around put options on certain stocks during earnings season.
I figured that even if I’m right half the time, the upside (2-3x) will amortize all the losses (which it has).
Ive been very successful in speculating in a niche form of real estate. Its a form of real estate where the natural resources present cover the full purchase price of the land. My rule of thumb is to never purchase the property without a buyer lined up for the natural resources that will be extracted. This is done prior to the purchase. Also, a purchase is never made without first insuring that the resources present will cover the full purchase price of the land.. My approach is strictly analytical and ruled by numbers. If the numbers don’t work – we pass on the deal. It isn’t how many deals you do that’s important , its how much you make on those deals is what counts.
I always prefer value investing which involves that you carry out fundamental analysis of a stock before you put in your money. The returns may be slow but if you have long term perspective, you will enjoy good returns except there is stock market crash.
“Barring a natural disaster, the $580,000 property I bought in 2003 with my VCSY money will still be there”
This caught my attention for reasons entirely unrelated to speculative investments but having to do with risk.
Do you have earthquake insurance on your SF property? I’ve not carried it for some time. It’s very expensive and the deductible is ridiculous but I always have this nagging feeling my properties are gonna fall into a pancake one day when SF gets hit again. Fingers crossed.
I don’t to do the cost. But I did sell the single-family home in the marina, which is a earthquake prone this year. So to me, that’s kind of like earthquake insurance.
Very well done article, and excellent points all should take heed. It is also interesting and worth noting the dynamics between the potential of Bitcoin (as a lead of cryptos) as it pertains to the global market place and other bubbles, from a long term perspective. While I am no expert in cryptos, I do believe cryptos (and Bitcoin specifically, at least at this point) represent a significant technological shift in the global economic landscape. This technological shift in the way monetary policy and trade is conducted, is of gigantic proportions. Moreover, only a very small fraction of the population has any exposure at this point, one of many reasons this could represent the very early stages of a revolution in commerce. Nonetheless, there still are so many uncertainties, that you’re right; it is prudent to not jump in within understanding the full dynamics.
Thanks for the quick emails Sam. I’ll keep the advice in mind when I pull the trigger to cash out.
Hi Sam, have you made more money overall with real estate and stock gains than with actual income from a job?
If you didn’t have that big windfall with that Chinese stock would you have bought a house so early in your career?
Luck does play a HUGE part in these things. I’m reading alot of San Fran and Silicon Valley guys are earning well over 6 figures out of school yet can’t afford to even buy a place.
Right place, right time.
Not sure, but probably not. Might be a good post! But I like to keep income and total net worth on the down low. How about you? Have you made more from your investments than your job?
If I didn’t have the VCSY windfall I may have still bought RE in 2003 b/c I had a 2000, 2001, and 2002 bonus. Ever since college, I’ve been infatuated with real estate.
I attribute any money I’ve made to 90% luck, 10% work ethic. It all starts with being born in a nurturing household with two parents. And because so much is due to luck, I can’t take things for granted, which is why I continue to work.
How about you? What percentage do you attribute to luck?
Related: To Get Luckier, Realize Success Is Mostly All Due To Luck
My money was “A Series of Unfortunate Events”, kinda.
I’m FIREd and attribute mine, like Sam to family. My father was an amazing tradesman, could fix/make anything. Never finished high school, GED to get into military. Mom can make money last for ever, she must of had a dollar stretching machine ;). They bought several old properties and fixed them up. Guess what I did in the summers with dad? Mom pushed for my engineering education. With out the knowledge of how money works (mom), how stuff works (dad), would not be me and would not have purchased investment property and would not understand investing.
Taking advantage of an opportunity may appear to be luck. I believe one’s luck is enhanced by their knowledge and experiences. I was given and created great experiences.
Can luck be improved by your past experiences?
Lucky plays a much bigger factor than we realize. I personally haven’t made more from investments because I haven’t bought a house yet. But if you factor in the parents house which has increased more than 10x in a few decades and is well over 7 figures, and when they pass it will be passed on to me and siblings, I won’t be hurting.
Now like many young people it’s too expensive to buy a house in my city even if you have a 6 figure salary.
With so many younger folks like you inheriting their parents houses, why do you think there’s so much angst against housing? You guys are going to inherit the most amount of wealth in the history of mankind.
Related: https://www.financialsamurai.com/a-massive-generational-wealth-transfer-is-why-everything-will-be-ok/
I wouldn’t say there is angst, but to see the huge run up in real estate makes people wonder if there is a bubble. I mean, I don’t expect to get this windfall for another 20 yrs or more. in the meantime I have very little chance of buying into the housing market myself.
The salaries just don’t match housing prices. I hear in San Fran it’s a similar situation. How do normal young people even live in that city?!
It’s triple balance sheets: two incomes plus parental down payment. Answer for first time homebuyers in the city, parents help by around 50 percent.
Sam,
Thanks for taking the time to thoroughly explain the synthetic indexing strategy. As many of the commenters have written, it’s not for everyone.
Interesting is that the comment we had about folks having difficulty combining the two piles of cash into one low risk market indexed investment seemed to come up. The irony is that people buying into EIUL policies don’t realize it, but this is very similar to what is happening under the covers. The insurance company hides the two products in a single product so as not to show the 100% loss of option premium in the down year.
As with all investing and life, moderation is important, one can go overboard with the strategy and “swing” harder the one should and take on a sprain with similar associated…pain.
The astute investor will note that market participation can be controlled from fractional participation to multiplicative ratios. Want some gold, use GLD options, want some emerging market, use EEM.
Since 1988, S&P largest number of contiguous down years was 3 in 2000.
Retirees that suffer a large loss early run a much higher risk of having more time than money.
Sam, do I get some royalties from the hits off of this article ;) ?
Bitcoin is like the quintessential bubble. I feel like in a several years, people will use Bitcoin as a case study for bubbles, just like tulips and the dot com bubble. As with the dot com bubble, it was founded on a real potential of the internet, but the timing was off. We see the amazing fruit of the internet now, 20 years later, but at the time, the internet was not as valuable. Now with bitcoin, sure, it might become some type of major currency in the future, but is that really going to happen so quickly? It’s fun to be witnessing a bubble in my adulthood – just seeing the euphoria and literally hearing my barber talking about buying bitcoin is almost surreal. I always heard people say the barber anecdote is the indication of a bubble, but actually experiencing it in the midst of a bubble is akin to checking something off my bucket list.
I’m not saying it’s not a bubble.
But the valuation being so high doesn’t necessarily mean it’s getting ahead of itself. Think of it as a probability-weighted outcome. If bitcoin actually becomes a widely accepted currency that accounts for a meaningful portion of the world’s value, then this valuation is a drop in the bucket.
If we think there’s a 5% chance that bitcoin becomes HUGE then the current valuation of $200 billion represents a possible future value of $4 trillion.
Sounds a little nuts, but there could be a lot of room to go.
I agree with your statement but never said the high valuation was the reason this is why I’m considering bitcoin to be a bubble. The dot com bubble happened based on real potential. We are far beyond the top of that dot com tech bubble because the potential of tech has been realized. The potential was not the problem, but the psychology of everyone buying into it. Things went up too far too fast I believe because of that state of euphoria when everyone is long a certain asset class and can only see and talk about the huge potential of it. Could it be that everyone piling into it is right? Yes they were in the dot com bubble, many years later, but not before the markets seriously corrected. But do people actually realize what they’re buying right now? I don’t think many people do. They see bitcoin going up and everyone else getting into it so they need to get in on this opportunity.
For example, how many buyers actually think past the point you made in your comment? Most people stop at “it’ll be a huge valuation and will become a widely accepted currency one day”. But take the goggles off for a minute here. Why is everyone Really buying bitcoin? Is everyone truly a believer or is this their opportunity for making millions in cash? I believe at the end of the day, bitcoin is only being bought in droves because it gives potential earnings in real currencies. If I told you you can buy bitcoin but never cash out back into USD, would people still want it hand over fist? I don’t think so. It’s not widely accepted enough for people to want to hold it like they would hold gold for example. So my point is if the promise that we buy into is that Bitcoin will become a widely accepted currency in and of itself one day, and that it will account for a huge percent of international transactions, thereby realizing its potential value, we need to also accept that the potential has not yet been realized and right now, in the midst of this euphoria, 90% of buyers are just trying to get rich quick in dollar terms by trading it. If you’re a true believer in bitcoin, then you should definitely buy it now and you wouldn’t regret if it dropped 50% in USD terms because the value proposition for you is far more than what it’s worth in dollars in the short term. You are buying to own the next big currency and there’s a potential of using it to buy goods with it one day.
But if you’re just trying to ride this thing until you make a million Dollars and cash out, then it’s a game of hot potato and everyone thinks they won’t be holding that potato at the top. Many won’t be and have gotten rich already, but there are also many who may be in it at the wrong time for the wrong reasons. Know why you buy something and truly accept the risk that comes with it. As hard as it is to see right now, Bitcoin could become worthless one day. It could take decades for it to become accepted too. Have we thought about how tax laws could affect it? What if the US government started taxing bitcoin more or regulated how businesses can use it in a detrimental way? It could happen. Also banks and institutions are getting in now too. While that is widely seen as a good thing, it also means they can manipulate it more. They will probably create hundreds of securities and derivatives based on Bitcoin and who knows what how that will affect it? Of course, anything can happen and it’s all random, so all we can do is truly accept that anything can happen to our investments and only then will we make rational decisions.
But back to your point, if the valuation potential is realized, everyone who is holding the potatos will come out a winner in the long term, if and when the true potential is realized and they hold through the roller coaster.
This reminds me of Nassim Taleb’s barbell strategy. Low-risk core with high-risk for returns. It’s just a choice between getting gutted occassionally when you’re 100% stocks and the volatility that brings, versus Taleb’s slowly bleeding to death through purchasing options that expire.
Unfortunately in our part of the world, we have higher inflation (c6%) but higher interest rates (c10%) so we earn a good risk-free yield for speculation, but we pay 40-50% on the nominal interest, so net-net we come out with a negative real yield and the longer it takes for your speculative investments to take off it smashes your principal in the risk-free portion. Makes it a little harder to pull this strategy off – I think it works well in low inflation countries.
Nothing wrong with swinging for the fences. I love the free markets! I am not a believer so put me on record for that one and I will eat my own words when it crosses 100K
I find it interesting to read so many comments talking themselves out of cryptocurrencies. This is a technology that is disrupting the entire financial sector. The rise is not attributable to ‘Greater fool theory’ or whatever else people want to pin it on. Blockchain doesn’t conform to conventional investment vehicles’ movements because it’s not a conventional investment vehicle. This is the black swan event that will transfer an incredible amount of wealth to those who bothered to learn and understand the space.
Of course, the internet was a similar deal, and plenty of people got taken for a ride. If you follow based on hype and without knowing the market you’re rolling the dice.
In my humble opinion altcoins are the next frontier. There is no real reason for BTC to have 50% dominance when there are coins out there that are much more targeted in use case, marketing, and development. When the less sophisticated investors catch wind of these established (not ICO) altcoins there will be a big rush into them. See AntShares/NEO which made percentage gains in the thousands.
I can understand those who sit out of crypto out of fear. But I also pity them if they are younger and need to build their core portfolio. I’m up 3-4x since summer and could easily take my initial investment out, but I’m letting it ride. I’m prepared to lose it all. But for 20-somethings with generally poor job prospects and/or crippling student loans, I can’t understand not putting a chunk of your savings to work in this space.
I’ve been spending a decent amount of time trying to wrap my head around this space, and I’m still on the fence.
But I’m interested to hear why you like the altcoins better than bitcoin (or any other widely accepted coin). Isn’t the point of a currency that it is fungible and can be exchanged for anything? If there are tons of different coins out there that serve different use cases, doesn’t that make the overall market less efficient?
Now if you’re talking about a different protocol/application to be used for smart contracts and such (i.e. not as a currency), then I get it. But what’s the point in having tons of different digital currencies?
Are you buying a lot of different altcoins to hedge out your risk of picking a winner? Or have you identified a specific one?
Anyway, this is a fascinating topic and I’m kind of annoyed that I didn’t take the time to learn about it a while ago!
I wouldn’t say I think altcoins are _better_ than Bitcoin. Bitcoin is still the king, for however long. But if you look at the speed and cost of transactions, it’s a poor choice for many applications.
What enables altcoins to exist as fungible currencies is the 24/7 high speed low cost transactions between cryptocurrencies that can be settled in seconds. See coins such as OmiseGo or TenX. OMG is aiming to mediate value exchanges in any form (e.g., fiat, bitcoin, even air miles) between payee and recipient. And TenX has brought out cards with which cryptocurrencies can be used as a regular debit card. So, in the context of extending the technology in ways like this, there’s really not much downside to having many different currencies.
You bring up an absolutely valid point that many tokens are largely useless or at least unnecessary. But, that’s one of the pitfalls of investing blindly here. You have to know and understand the use of a token and justify its existence to yourself.
Personally I usually look to hold between 3 and 8 alts, roughly. And much like stocks, you really should never go all in, you should diversify, you have to know when to hold and when to fold etc. It depends on the token, too. For example, recently there was Request Network, and I was quite happy to go in big on that one – they’re backed by Ycombinator and had a lot of fundamentals going for them. Other coins, I buy a little less. And I always try to be around 50% BTC minimum, because the price swings on Bitcoin are still very influential on the entire altcoin market.
And don’t worry about not getting in to it earlier! Still plenty of time to do so, I think. Yes, you hear barbers talking about Bitcoin, but that’s it. Lots of hype and adoption will flow to alts soon, in my opinion.
Great and timely post. I and most of the investment community have had a lot of intrigue about crypto curriencies of late.
I have arrived at the opinion that it’s a bubble and while I am wrong on a good number of things I am not overwhelmed by FOMO.
Am interested you included art in your post as an example as that’s also a really interesting alternative asset.
I can see a correction on the horizon and think a neutral risk, higher liquidity position may be best at this time.
Anyone who is on the fence about bitcoin and cryptocurrencies as a whole, I would recommend at least watching a couple of Andreas Antonopoulos’ YouTube videos: https://www.youtube.com/watch?v=l1si5ZWLgy0&list=PLPQwGV1aLnTuN6kdNWlElfr2tzigB9Nnj . Not saying you will come to believe in it, or that you should put money into it, but gathering knowledge that is not solely from often misinformed mainstream sources is never a bad thing.
A brief bio of Andreas from his website: “Andreas M. Antonopoulos is a technologist and serial entrepreneur who has become one of the most well-known and well-respected figures in bitcoin. He is the author of two books: “Mastering Bitcoin”, published by O’Reilly Media and considered the best technical guide to bitcoin and “The Internet of Money”, a book about why bitcoin matters.”
Sam – great post and timely! You wrote that in retrospect you would or should have kept hunting- so true- everyone that reads your post should consider this and also learn about shorting or taking the other side of the trend. The trend isn’t always up, sometimes it’s down and that’s just as good some would say better.
Get rich quick strategies like this rarely work. Sure, some people will be successful but you could invest in all of the speculative categories you mention and lose it all. It also helps when they know what they’re doing rather than just following a crowd with no conviction. It’s much better to be in proven investments like the S&P500. The historical average 10% yearly gain with dividends doesn’t sound exciting but over time it works.
I keep thinking about one of Warren Buffett’s rules of investing “Don’t lose money.” Speculation basically guarantees that you will eventually lose a lot of money.
Great stuff, Sam! And a well timed post for my self. I’m on the verge of a promotion to a Director level position at my company which should bring me a hefty raise and increase to my annual bonus, upwards of around 40k per year!
Now that we’re living comfortably, it will all go towards after tax investments. I plan:
5% – swing for the fences
10% – save for big blue chip bargain buys that pop up throughout the year
10% – VNQ, other than our primary residence, I have no exposure to RE, so this should help with that
15% – VXUS, international index exposure
60% – VTI, total stock market index
(as I get older, I will be also adding BND or a bond fund, but at 32, I’m working on building equities!)
The top 2 line items at 15% should hopefully meet the criteria of accelerating getting rich while I have enough allocation to indexs to get rich slowly too!
This is also known as the “minimize fat tails” style of investing: put 90% in risk-free CDs or a U.S. Treasury ladder and invest the remaining 10% to really swing for the fences.
Somehow I lucked into buying a few bitcoin prior to this massive run.
I sold a couple on the way up and put it into an angel investment.
When will I learn? :)
Ah, but you can never lose if you lock in a gain! Perhaps your angel investment will be a 10 bagger. Yah never know.
I trade options for a living. Depending on your strategy and level of expertise, options can be conservative investment and generate a very good living. Of course you need the initial bank roll because 100% of shit is still shit.
I still can’t decide if Bitcoin is all smoke and mirrors or the real thing. I think probably a bit of both. I like Doneat53’s strategy and it makes sense. It’s basically using found money to go play with. Alas right now all of my found money is being put toward my own risky investment of starting a business.
And I may have missed it but whatever became of VCSY?
I just don’t have the gut to invest like that. The risk of losses seems so high. I’m much more the slow and steady type. I’ve invested in a couple of startups and lost all my money. This kind of investment just isn’t the right fit for me. You did great, though. Nice job.
What an amazing experience that must have been with VCSY. I wish I had one like that. I’ve always been pretty low risk with my investments. The riskiest I’ve ever gone was owning some retail stocks when I didn’t know what I was doing and invest in some single name structured notes
Sam – thanks for a great post. I’ve been a fan of the site for several years now and have taken your advice to heart (1/10 gross income for buying engagement ring, building emergency funds, maxing out 401K, going to business school and working in high paying finance job post graduation – IBD, starting family in early 30s, investing in 529 plans, etc.). I’m looking for advice on how to allocate my upcoming post-tax IBD bonus – 1) pay off business school loans (~$60K), 2) down payment on home, 3) invest in speculative investments, or 4) save. 1) On the subject of student loans – I haven’t been following the FS DAIR program (although very simple and brilliant) on paying off my student loans, instead I used my signing bonus and last years bonus to pay off 1/2 of the original balance. I didn’t really think about other options and saw the huge initial balance (and monthly payments on 10 year repayment plan) of the loan as something to address. The impetus here on paying it down quickly is the interest rates on all tranches are ~6% and I haven’t yet refinanced through private student loans. Currently, I’m paying the minimum payment ($~300/month) on the extended graduate program (25 years) in order to maximize monthly cash flow and increase the monthly payment as my salary increases. I’m holding out on converting to private loans because of my dreams of someday working in the Foreign Service (if I can pass the entrance test this Feb) and the student loan forgiveness program requires federal loans (although recently this program has been under fire from the new administration). 2) On saving for a downpayment, I have a small amount of money invested in a conservative mutual fund (VSCGX) with a time horizon of 5 years that I’ll continue to add to in order to someday have ~$150K and apply 30/30/3 principle for buying a home. However, at the current savings rate on the home it will more likely be ~7 years. 3) On speculative investments, after reading this post all of my plans have changed! In theory, I could delay paying off the entire balance for a year on my loans and allocate $3-5K (keeping below 5% of overall investment allocation) towards several speculative investments. I have been dabbling in BTC/ETH/LTC and made a small return (investing over the summer) and plan to hold on for the long term (although I should be “selling the news”.) I have seen the posts on RealtyShares and see it as a very appealing way to get exposure to real estate (since I currently own zero physical real estate), although I don’t yet quality for the “accredited investor” net-worth or gross income tests but plan on exploring this more in the future; so this isn’t an option. I have been following some IPO pops and drops but don’t really have a view on a specific company (although I believe Blue Apron is a nice pick). 4) Lastly, saving is the most simple option that affords me the ability to make a future decision. Thanks for reading the entire question, I know it was long :-)
The best advice I can give you is to give as much as you can first before asking or taking! This is truly one of the best ways to build a great network and to generate a nice fortune for you and your family. Happy holidays!
Well said.
Your VCSY story sounds amazing! I know there was a lot of thinking that went into it, but it still sounds like a big sudden success!
I think I either hear, read or watch someone mentioning Bitcoin almost every day these days. The good thing is hubby and I don’t have the money to invest in Bitcoin at the moment, so we won’t. I’m also too risk-adverse to invest in it. But I can see how it can make many people get rich overnight.
Never done any speculative investing but it is tempting. As others have pointed out I don’t have a very significant amount of capital I would feel comfortable putting towards this type of thing. However, your story is incredible turning $3K into $153K.
I almost feel like you need to be rich before you can (should) play this game.
Yes, or bullish about your future or feel like you have an investment edge (knowledge) over others.
Speculation is largely LUCK, and being able to forecast something before the herd (liquidity) comes charging through.
The irony is that it’s hard to get rich without taking non-mainstream bets. Further, there’s a great saying in poker, “no bet, no win.”
Just make sure you realize all the money can and will go away.
Related: To Get Rich, Practice Predicting The Future
This strikes me as a strategy that only makes sense once you’ve already made “your number” and are financially independent. This is not a strategy for becoming rich in the first place. To make enough risk-free money to invest the returns you will need a large pool of assets to start with. The biggest downside is the value of compounding, sure you might not get rich quick with 8%-10% returns but you will get rich with time. In this scenario if things go wrong you’ve had a 0% nominal return (-1.5% to -2.5% real return annually) for however many years you try it. If you are still young and do this for 10 years and realize you lost money on all your speculative investments, sure you haven’t lost your principle but you have forgone more than doubling your money if you had just invested in the market. Given the power of compounding over time that lost decade is a huge opportunity cost, particularly if you are young.
If you’re already rich and looking for a way to protect your wealth without completely sacrificing the potential to make money then this makes more sense. You don’t need any ROI on those funds in the “safe” investment pool so it doesn’t matter. The goal is to just not lose what you’ve already built up over time.
You can always just allocate 5% – 10% of your investable assets and swing for the fences as well. I was not financially independent at 22-23 years old when I made the $3,000 investment in VCSY. But I felt confident I wasn’t heading to the poorhouse b/c I was just starting my career.
You don’t need to be financially independent to earn $3,000 in low-risk income either. At a 3% interest, you just need to have $100,000 in low-risk investments.
This is not a black-or-white strategy. There are nuances every person must consider.
If your original investment is small, say 1% of 5k (50 dollars), even if you get 1000% returns per year, you will still only get 500 dolars out of it. The time spent on researching those speculative assets – because you still need to do your research, and do your taxes and open and close accounts and so on – well, that time can be better spent at work, trying to get a promotion. You’d be better off.
This doesn’t make much sense for small amounts. If you have half a million kicking around, sure, 1% of that is still 5k, speculate on that, you’re looking at 50k a year. That makes sense, timewise.
But would you spend so much time to speculate if the payout was 500 dolars? Because the time spent on identifying those beat up stocks or buying the newest blockchain coin or that amazing art is the same, even if you invest 10 dolars or 10 thousand dollars.
You would be much better off investing the time in a work certification to improve your take home pay than researching the latest fad for a 10000% increase in the stock that turns out to be a 100 dollars payout.
You have to start somewhere. It’s better to start with small amounts of money when you don’t know much, than big amounts of money. In the beginning, you’re learning. And after a while, you’ll start earning.
Of course you have to start somewhere, it’s just that speculating for small stakes is, in my opinion, not that place. It is also unlikely to get you rich quickly, because small stakes barely move the needle, net worth wise.
Better spend all that time in getting better at something else, something that would move the needle. Or even just go on lots of dates, after all, your future spouse will probably impact your future net worth a lot more than choosing the right blockchain flavour of the month for a 50 dollars quick win.
I’m not saying that there aren’t people who would do extremely well on this type of investment, I’m saying that most people would not. And I’m talking about speculation, not investment.
I guess my story in the beginning of this article about investing in small stakes didn’t provide a proper example. Maybe other people will eventually comment on how investing in a small stake helped. In a way, my small stake in VCSY has been parlayed into a $1.2 million paid off property.
Investment amounts are generally correlated with income and net worth. Therefore, if you have a small net worth and income, the steaks will be smaller and vice versa.
The things you recommend are not mutually exclusive. Why not try to do more and find an awesome spouse while also trying to invest? I realize investing is scarier for some people than others. But with this framework, you’ll always have your principal.
I guess it comes down to what you consider small stakes. For me, and I guess for the majority of people, 12k to invest in purely speculative investments is not small stakes :). It means you have another million dollars kicking around, in safe investments that give you your margin of safety.
But I grant you, I’m probably among the poorer people reading this blog, because I’m not from the US.
True. But I invested $3,000 in VCSY, not $12,000. I wish I did though!
Hi Sam,
I”ll give you an example of starting small leading to something big. My first stock ever bought was a company called Alpnet. Don’t ask me what they did or sold because I have no idea. My older sisters boyfriend was a stockbroker and told me to buy it. I invested $700.00 and doubled my money. Although the dollar amount is negligible the experience was priceless. That 700.00 gain installed a love of stocks that over the next 25 years has provided a nest egg that hopefully will sustain my family for at least a generation, maybe two.
Thanks, Bill
This is one of the most interesting articles I have read. I allocate 2% to 5% in Highly Speculative Alternative Investments. Currently, for me those are Angel Investing, Royalties, P2P Lending, Options Trading. No single spec investment can be more then 1% of my portfolio’s value. My biggest win was in Vintage Sports Cards. An Investment into a Babe Ruth RC returned 300% in less then a year. After my wins I usually replenish the spec fund from my losses in other spec plays and put the rest into my core portfolio. My least successful spec plays are in Options Trading and Angel Investing (which I stopped doing)
Troy
I did a speculative bet many years ago with a Chinese solar company. Of course, it went bankrupt and I lost some money. The only part I’m glad about is that I learned my lesson early on. I suppose I don’t mind taking my time and slowly building my net worth. I have a passion for personal finance and if I were to win the lottery (which I hardly ever play), I’d still continue to manage my investments just because I enjoy it. :-)
Yes, it is hard to get rich quickly investing in an index fund.
On your questions:
1. How much of your capital do you allocate to highly speculative investments?
– At the moment, less than 1 percent. This number was 0 a year or so ago. As we finalized our emergency savings, finished grad school (for Mrs. BD), and moved from NYC, we evaluated some other short-term goals and then began having some excess capital.
2. Do you have any big wins?
– A 200% gain in a struggling oil name, but the proceeds were only $1500, so small from an actual dollar perspective.
3. If so, how did you spend or reinvest the proceeds?
– We always look to reinvest the principal of capital that has been allocated toward speculative or growth investments and, depending on the size of the proceeds (among other considerations), we’d spend 50% and invest the other 50%. In this instance, I reinvested the proceeds as part of our initial investment into a crowd sourcing real estate investment.
If you are still liking the possibility of Angel Investment, just like real estate, I would suggest looking into the Midwestern syndicates. Buy in minimums are not at coastal premiums. Potential downside; odds for the unicorn are lower by current stats but you don’t need a unicorn to make good money. Other option is to look into the growth financing funds, still a high risk play but compared to Angel Investments they tend to mitigate the threat of the zombie company that ties up investment capital far beyond the 5-7 year goals. These products are advertising to LPs a 2-2.5x return with incremental payouts starting at year 3.
Thanks for the info on cryptos, they are next on our list to research and understand.
I have a relatively large allocation towards heartland real estate. Wrote an entire post about why I’m investing in the heartland of America through real estate crowdfunding, which is like a syndicate.
Can you recommend a resource on where to look and research for growth financing funds? Are you referring to venture debt?
Yes, venture debt is the common term. Here is a link to a fairly comprehensive background article with a few firms referenced that you can do further digging. https://www.kauffmanfellows.org/journal_posts/venture-debt-a-capital-idea-for-startups/
Once again, fairly popular (read high buy in) on the coasts but the concept is spreading to the Midwest with funds starting up in a few places without a 6 digit minimum buy in.
I have about 1 percent of investments for speculative vehicles. I don’t agree with the other commenters position as you lost interest and thus lost principle due to inflation…. but… I still favor some small portion of your portfolio as play money. It’s a good psychological hedge to keep you from playing with your overall account.
I’ve been so badly burned in the past that it holds me back from jumping into any of these types of things. I think I just need to build up a little savings account of money I’m ok potentially losing.
My brother-in-law is one of those people that has made a killing on bitcoin. I thought about investing in it back then but I was just out of college and didn’t have enough to spare yet. Then it just snowballed into not doing anything.
Hindsight…20/20
I’m with you Budget on a Stick, getting burned in the past has me very leery of speculative plays like Bitcoin. There is money to be made like Sam points out, but timing markets is impossible. My approach is to take the route of the tortoise and sleep easier at night.
I haven’t gotten burned in the past, but I just don’t like losing money in general. Maybe that’s why I’m not rich yet @_@
I caught some falling knives when I thought I was getting a great deal from the market panic of a company stock. It was $1000 and I lose $600 of it (tax loss harvesting). That’s as dangerous as I’ve gotten in the realm of stocks.
(Being a smartass) I’m really clumsy so I’ve learned to let falling knives hit the ground… except you have to make sure your feet aren’t in the path of that falling knife too.
I did this recently with out of the money call options, twice. I made 6x and 4x my money. I redeployed the funds into a steady blue chip pumping out dividends. Those dividends now account for 2x the original investment. Too bad my speculative, play money started with less that $1,000.
Alas, I can’t get behind bitcoin. Maybe I’m wrong, but I am ok with that.
I’m thinking if doing Diverculation (i.e. diversified speculation). I’ll buy Bitcoin, Etherium, IOTA, Litcoin, Ripple with risk capital.– potfolio allocation of 20% each and then forget about it and hope to become a multi millionaire in 2 years. What do you think of this strategy?
I’m thinking of doing this same strategy. Allocate 5-10% of portfolio to crypto, and split it between 3-5 coins. I’m confident in the underlying technology as a whole, but picking a given coin is a tough game to play.
The “CD strategy” doesn’t make sense because there’s seemingly no ending to it and you are getting a pathetic return in general.
It makes much more sense to just look at your earnings holistically and, as you mentioned, take whatever percentage you’re comfortable with investing speculatively. I’m not sure why you’d set aside any amount to put into CDs for any reason. Even if you just want that guaranteed rate that barely covers inflation for whatever reason, it still makes more sense to look at your entire earnings, not just earnings from CDs.
The problem with speculation is knowing when to stop. You cant watch your Bitcoin go from $200 to $13k and then double down hoping it will go to $20k. Similarly, you can’t pull out at $13k and kick yourself when it goes to $20k. But (most) humans will inevitably feel regret or behave irrationally regardless of the gains. It’s better to build things that last from the beginning. You can’t use Bitcoin as an excuse to start going all in on speculation since on paper speculation doesn’t really make sense as a long-term strategy, if at all.
I totally agree with you about the Bitcoin issue. I had never participated in cryptos except a few months ago I bought 1 bitcoin at 3800. Bitcoin had previously run up to 4800 from 1000 in the span of a few months so I figured that if it pulled back to 3800, I would buy 1 bitcoin and then sell it if it gets to 7000. In my mind, I was risking about 2800 (since it seemed like Bitcoin probably wouldn’t drop below a grand longer term) and then I was giving myself an upside of 3000. Anyway, I think I held it for 2 months before it got to 7000. My total net worth is about 850,000 so I was gambling with absolutely nothing here. But I didn’t want to gamble with more because I knew that if I had put 50,000 into bitcoin, I would have been super anxious and probably would have sold the first time it went down at all instead of being mostly detached because it was such a small dollar amount. So anyway I sold it at 7000 and I feel like I made the right move because I executed the plan that I had originally set out to do. I’m definitely bummed that I could have an extra 9000 right now if I had kept the bitcoin but I also feel like I got really lucky and made 3200 over a couple months while gambling with a tiny amount of money. I will surely be super bummed out if bitcoin runs up to 100,000 or something but what can you do. In the end I’m grateful that I made a little money and got out unscathed.
I’ve done the same with stock. I had a large position, sold some after 300% gains, some more 500% gains, sold half of my position at 1000% gains, and then sold almost all of the position by 3000% gains. The stock is currently at 16000+% gains. Ouch.
I have 5% in spec investments. I looked at bitcoin but I just didn’t want to put in the time to figure out how to buy and sell it.
Anyway, what I usually do is sell 1/2 at 100% gain so I’m then running on “house money”. Cut another 50% on the next double then hold for the moonshot. So far been pretty lucky but….
It doesn’t really move the needle. If you’re playing with money you can afford to lose (your equivalent of nothing) even if you triple it you now have 3x nothing. But it’s cool to talk about your wins.
I feel like Sam was just throwing out the idea for those who don’t know exactly how much (if at all to put towards speculative investments). I know I’m one of them. It’s suppose to be mentally assuring for skittish investors to try out new ropes. The CD strategy is quite clever IMO :)
This is something I’ve been focused on in the past month as well. I searched back to your earlier articles and advised Personal Capital for advice on how much capital to allocate to “alternatives” like bitcoin. My answer has been around 10% of my portfolio is what I am willing to thrust into speculative investment. When I employ that strategy it pushes me to work on building my total available assets so I can expose more dollars to the speculative asset class and participate in the proliferation of the bitcoin rally.
Been heavily looking at digital currencies recently though have some reservations. May treat them like an alternative investment which I’m light on anyway.
I looked at getting into Bitcoin back when it was 2300 a coin, now don’t want to pay the current price compared what I could have paid..
Speaking of speculative stocks thought, I’m currently investing and blogging about the newly forming cannabis stock space. (Canadian stocks) With speculative stocks there have been some major ups and downs which is part of what I blog about. I ended up cashing out most of my boring dividend stocks and putting them in to weedstocks.
I’ve currently got a portfolio of around 350k in weedstocks, the thing I like the most about Sams post is the idea of taking this money and putting it back into dividend stocks and use those dividends to invest it speculative stocks. Would mean I no longer have to worry about such a large amount of money being left in speculative stocks.
If you are interested in a speculative sector but missed the boat on bitcoin, weedstocks might be the next big thing. The world is really starting to open up to the idea of legalizing recreational weed to take the money of the criminal organizations. Medical weed is catching on even more.
Anyways, thanks for the great article!
Morning Sam,
I like it. From FS-DAIR for debt destruction to FS-SIF for the potential to increase net worth much quicker. It appears that you have a line on your own type of financial product/advice market aside from the site.
I am glad some of the cryptocurrency is doing well but may be a bit too volatile for me at this stage. Do you hold any cryptocurrency?
–J