Speculation Defined
Speculation, eh that's a dirty word.
In recent years the word "speculation" has become synonymous with a "hold and pray" strategy.
In fact, speculators and speculation is known to facilitate many bubbles and contributes largely to the boom-and-bust nature of business cycles.
Benjamin Graham, Warren Buffett's mentor, figured this many decades ago and created the value-investing strategy to capitalize on the short term view of investors. In the simplest form, Graham recommended buying when people were overly pessimistic and selling when people were overly optimistic.
Graham kept a cool head under crisis. After all, Graham realized the very obvious yet overlooked fact that businesses were fundamentally a vehicle to return cash to the investor (over time).
One of the most interesting books that I've read recently was a detailed breakdown of top hedge fund strategies over the last century. One of the most common tactics for hedge funds was taking large one-sided bets. If the desired event/action was taken than the hedge fund would be rewarded immensely. Using these strategies, the hedge fund managers only had to be right more than 10% of the time to profit greatly and achieve higher-than-market returns.
Which brings me back to speculation and the main question: is it possible to speculate in a safe way? Better phrased: How can one gain the benefits of speculation without taking the risk?
Outside of running a hedge fund one of the best ways to speculate safely is through real estate. The way you do this is by jointly incorporating the above strategies.
How does real estate gain its market price?
Let's think about what a real estate investment is.. A piece of real estate has two different values:
1) The value it commands as a rental
2) The value it commands as a sale
Interestingly enough, these numbers do not move closely together. For example, in Southern Florida, several pieces of real estate values went from $410k to $120k while rent only decreased by 10%.
Let's look at what it means to own a property. I believe the most effective way to look at holding a property is to see owning a property as an option to sell that given property.
If the property value goes up then you make good money great. If that property value goes down then it is not the end of the world as you break even while you hold it (or close to it if cash flow covers mortgage expenses) and build equity as the mortgage is paid off.
This is an awesome deal SPECIFICALLY in highly speculative volatile markets. Let's think about it in terms of options, an option is always more expensive in times of volatility. The reason for this is because in the event that the stock plummets you don't lose anything and if the stock appreciates a lot you make a lot of money.
The thing about real estate is that unlike stocks it does not go down below their intrinsic levels for sustained periods of time (because of simple return on investment levels) but they do sometimes go up because of demand for owners to live in the area. The idea is then to buy the property as an investment and to sell it as a residence.
The sweet spot in highly volatile markets is right at or slightly below break even cash flow (it will not rarely better then that).
For example, one Florida community in which a close family member has started to purchase properties has had the same market fluctuations over the last 25 years.
When do you sell?
Just like with stocks, it is nearly impossible to "pick the top" without some luck. The good thing about real estate is that using historical values you can often pin down that the top will be somewhere between two numbers and a given time period. The other cool thing about real estate is that it is an illiquid asset and if you keep an eye on the real estate market (using simple fundamental tools), then you can see when the top has been reached.
A conservative general rule of thumb is to figure out what kind of return you would like to have 2x or etc. and to sell when it hits there. If it ends up going higher (as it invariably will) you can always know that you gave the other person a solid deal.
The Profit
Like you, I value my time. Therefore,
The Summary
if it goes down it's not not the end of the world because you can hold it for as long as you need (as it isn't burning a hole in your wallet, it is only building the equity you have in the property). By the way, this is the opposite
The reason
For example, let's assume that you have a property that has $0 cash flow after mortgage payments..under this model
, if the property goes down 50% it doesn't really ma
The way to speculate successfully is to hold a highly volatile
It can't go down, intelligence is there..
Variance is an option to buy
The way to speculate successfully is to
-One sided bets (like hedge funds)
-Minimal negative cash flow, take the variance or check out prices
-Variance is an option to buy
-Keep cash minimum
-Short sales (specific real estate agents)
Buy Cash
Domain specif agents
-Numbers (outside of tax advantages)
-Don't be greedy
-2x return over 4-5 years is really roughly a $30k (375% return)
$30k and get back $140k
-Chunk by agent
-If you want to be 5 go for 15..
-Regret is a trapped emotion which can be solved through a simple process called time line therapy..
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