There is a difference between investing and speculating. With investing, you know that you are going to make money, and you can estimate the rate-of-return you will get, within a range of percentage points. For example, if you buy a set of index mutual funds with low fees, diversified to include large and small US stocks (like an S&P500 fund and a Small Cap fund), and hold them for 15-20 years, you pretty much know you will make money and you’ll probably get an annualized return of between 8 and 12%. You can assume this because all of the whole-market investments in the past with holding periods of 15 years or longer have always had a positive return and for most, except for periods that start right before the beginning of the Great Depression, returns have been at least 8%. Most bear markets last just a couple of years, and when they end stocks race back past their old highs quickly. The natural tendency for the markets is to grow because businesses are always expanding and growing more efficient, and because there are always more people being born, who then start producing and consuming things. This may not always be the case, but when it stops, you may be worrying about a lot more than the returns on your mutual funds because you’re looking a an economic collapse.
Speculating is unpredictable and has no assurance of a positive return. It is true that you can make lots of money quickly with a good speculation, just as you can make money at the roulette tables in Las Vegas, but there is no guarantee. People who are serious about making money invest. Those who are in it for entertainment speculate. A great book talking about the difference that every new investor should read is JD Spooner’s Do You Want To Make Money Or Would You Rather Fool Around ?
That said, there are times when even the serious investor can read the writing on the wall and may choose to make a speculation. One of those times is when a whole industry (or even the whole market) has been beaten down, taking the good stocks with the bad down in price to the point where many companies are obviously greatly underpriced. During these times you can try to goose your returns a little bit by loading up on a couple of different companies in the sector. In fact, most of the upside you’ll see that leads to those returns of 8-12% occur right after periods such as that.
Retailing, or more specifically, brick-and-mortar retailing, is in such a phase right now. There are many good, strong retailing companies that have seen their share price decimated as Amazon has moved into the marketplace for virtually everything big time, making some investors sell with abandon, to the point where many great companies are at bargain-basement prices right now. Many of these companies are still making great profits, but just have seen their sales slow down a little (or even just said that they expect their sales to slow a little over the next couple of quarters) and as a result seen their share price drop fifty percent or more. This presents a buying opportunity. Normally you could expect to possibly make an annualized rate-of-return of 10-15% with a good retailer, but at times like this, you might see returns of 100-200% over a year or two. Coincidentally, Amazon was in just this same position in 2001, falling from $110 down to about $5 per share as all of the dot com companies burst. Today it is at about $1100.
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Of course, as I’ve said, this is a speculation, meaning you could be wrong and lose money. If things are really changing and retail stores close down because people would rather order from Amazon and wait for the drones to deliver their goods, you could lose money, perhaps your entire investment. The timing is always tricky as well since stocks tend to stay down longer than you would expect, so you could buy in and then see the share price continue to drop before eventually turning around and shooting up. You need to be willing to buy in and sit on the speculation for some time, perhaps a few years, before things turn in your favor. You also need to only invest pn;y what you can afford to lose, because not every speculation works out.
I had about 400 shares of Chicos FAS, which sells women’s clothes, in an IRA that I’d bought at about $10.50 per share back in 2011. The company had done well, going up near $20 a couple of times since that point. The company has been battered down lately, however, along with virtually all of retail, trading below $7.50 last October. The company is still making money, but their earnings are expected to decrease a small amount over the next couple of years. It seems like losing 70% of share price in exchange for seeing earnings cut by a couple of percentage points is overkill to me, so it looks like an opportunity at a turn-around. The company has shown that they were able to make money consistently in the past, and I believe they probably will continue to grow in the future once retail figures out how to handle the online rivals, making them a long-term investment in addition to a speculation.
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I went ahead and bought another 950 shares of Chicos back in the middle of October for $7.40 per share. If retailing is truly dead, or if the executives at Chicos cannot figure out how to turn things around, I could see a big loss. I saw things go badly for Pacific Sunwear and lost a whole position in the past when the company ended up filing for bankruptcy after years of profitable, reliable growth. Still, if things do turn around and they go back to their old highs near $20 within a couple of years, I’ll see a 200% return. I’ll also be making a profit as the stock passes the $10.50 mark where I bought the original shares, instead of just breaking even after waiting 8-10 years.
So far things are looking up. The stock has bounced off of its lows and I’m up about 3% on the new position. Of course, I’m looking for a much bigger profit than this since this is a speculation. I’m also fundamentally a long-term investor since that is where you make the real gains. I’m not looking for a 5-10% gain, but a 1000%, life-changing gain when I invest, even when I’m speculating. I also believe in the fundamentals of the company and think the company executives will figure out how to shift things around, possibly selling more online themselves, so I am willing to give it time for things to materialize since that reduces my risk greatly. Remember that risk is inversely proportional to time, so the longer you are willing to hold and wait for things to turn around, the lower your risk will be.
I also don’t think that brick-and-mortar retailing is dead, especially with clothes. People like to be able to try things on. People also want somewhere to go and things to do, and tend to buy impulsively when they are out shopping. Plus, Amazon is trying to figure out how to have same-day delivery, but that is what you already have with traditional stores. If you want it now, you head to the mall. If it can wait a few days or you aren’t close to a mall, you order online.
If I’m wrong and retail dies a slow, agonizing death, I might end up selling out at $4 a share, losing a few thousand, or maybe even see the full $7,000 disappear. That’s the risk you take when you speculate.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.