“Momma always told me not to look into the sights of the sun…” (Blinded by the Light, Bruce Springsteen)
I’ve been thinking a lot lately about risk. Specifically, how I don’t take enough of it. And how it’s about time, dammit, to throw some caution to the wind.
The way I see it, everyone in some way loves skydiving, but mostly as long as it involves watching other people skydive. If the chute doesn’t work, rather than lose your own life you can simply say “oh well” and go back to finding just the right GIF on your phone to commemorate the moment.
Or you can play along and go on a “group jump”.
Same with investing, when some crazy coffee-swigging blogger suggests a number of ways he can turn $50,000 into much, much less — with very little effort.
I’m Investing $10,000 in Each of Five Risky Ideas
Below are five things I’m actually investing in that many would consider borderline insane. Some of the investments below will show their stripes fairly quickly (good or bad), while others may require years of patience.
Care to join me?
I haven’t suddenly become deluded by all those wild gains in the stock market. I’ve always preached a solid, diversified investment allocation that by definition spreads the risk and is bound to “miss out” on the latest frenzies. And I certainly don’t intend to change that. Plus, the market is certainly due for a correction after a nearly-relentless run-up. A five or ten percent decline would be perfectly normal. So one might say now isn’t the time to take on even more risk.
However… Did I own Amazon at $100 a share at some point? Yes. Did I sell some at $200 and some at $300? Yes. Did I hold any beyond that? No. And now it’s over $1,400 a share. I just didn’t see the potential returns beyond $300 a share because, while Amazon had proven to be a great and powerful company already, it wasn’t generating much in the way of profits and the price/earnings multiple (PE) was starting to look pretty astronomical. But the market didn’t’ care, Amazon went from great company to world domination, and a little more preponderance for risk would have gone a long way for me.
Adding Some Speculation Does Not Mean Abandoning Diversification
I’ve had my investable assets (i.e. anything other than my home equity and immediate savings) allocated around 70% stocks/ 30% bonds + cash for a while now. So as the overall market saw gains of approximately 30% over the past year, my portfolio gained around 19%. Not bad given that I made the bargain with myself that unless I was 100% in stocks, I would not earn 100% of the gains (or losses).
But what I’m talking about in terms of risk is not whether to pump up my stock allocation beyond 70%. That type of “risk” adjustment can be made over time, but should generally only be shifted at various points in your investing life, and not as a reaction to what is going on in the market (other than to rebalance to your target allocation).
No, my pining for risk has more to do with whether to dedicate a small portion of the total to truly speculative investments with the understanding that some will likely “fail” (lose a lot of money), some will fall flat (realize returns that are slightly negative or slightly positive, but don’t keep up with “the market”), and hopefully one or more become largely successful (huge gains!).
I’m finally ready to take this turn toward more daring investing for a couple of reasons. First, “Lottery Logic” – you don’t win if you don’t play!
In my core portfolio I own a mix of large-cap and small-cap index funds, foreign ETF’s, equity income funds, some growth stocks and several dividend-paying stocks. But it’s understood that AT&T and Procter and Gamble will never shoot the lights out.
Second is a more primal urge:
“… but momma that’s where the fun is!”
You knew I had to complete the lyric at some point.
Maybe I’m tired of seeing things go pop all around and not even being in the game. Or I just haven’t experienced the thrill (at least since the heady dot com days) of seeing a stock go to zero :
An important caveat: these ideas are strictly my own as part of a much larger portfolio and are not a recommendation to purchase any specific security. A common guideline is to commit no more than 5%-10% of your total to these types of investments.
You might say these are ranked most to least risky, but only time will tell!
Speculation #1 – Bet Against Tesla
Tesla is by all indications a truly great company. Its electric cars have captured the imagination of millions of people, and the product reviews are at the very top of the charts. Plus, who would bet against Elon Musk, the visionary founder behind PayPal, SpaceX, Solar City, and that giant transportation tunnel thing he just started digging under Los Angeles? With 400,000 people putting down deposits on the new Model 3 (for which the company projects annual production of 500,000 by the end of 2018), the excitement is real.
But there’s a huge difference between a great company and great stock. As with all five of these speculative ideas, I could be dead wrong. But wanting to bet against Tesla comes from two perspectives: financial and professional.
I won’t bore you with too much financial info and the inherent risks (but you can read a bunch of it in this article, plus any number of forums where a number of analysts share my skepticism).
In short, the company is burning though billions of dollars trying to ramp up to mainstream production, and I have huge doubts the Model 3 can reach anywhere near it’s promised volume in the next couple of years, if ever. The need to raise more cash to keep the company churning toward eventual sustainability is not just a potential risk but a very current concern.
Plus, my professional insight, having worked in the mega-auto industry for almost three decades, is that Tesla may be in denial of all those millions of things that can go wrong in building mass-market vehicles. Not only potential quality problems and production delays, but massive additional capital requirements, extreme margin squeezes when new competition is introduced, and of course the paralyzing effect of a sharp economic downturn (and no, they’re not immune).
I feel that their stock market valuation of $60 Billion (about the same as GM, which is consistently making billions of dollars in real profits) seems to imply they manufacture magic pixie dust, not cars.
So, my investment “vehicle” of choice is the long-term put. As of this writing, I can buy a January 2020 put, giving me the right to sell 100 shares at $280 per share, for $4,400. With the stock currently around $350 per share, the price would have to fall more than 20%, but I’m willing to bet there will be this kind of correction, and then some, sometime in the next two years. If the stock falls below $280, the value of the put will rise substantially.
By the way, I am choosing to buy the put because it is actually less risky (relatively speaking) than actually shorting the stock. With shorting, the potential loss is technically unlimited (what if the price goes to $1,000 or $2,000 a share? Oops). The most I can lose with a put is my investment.
Speculation #2 – Bitcoin
I have generally stayed away from Bitcoin, and frankly didn’t even consider it as I watched the rise from $1,000 to over $19,000 in just over a year. No amount of risk told me to try to jump this fast-moving train. But it has now shaken out somewhat to around $10,000. Could it go back to $1,000, or even become worthless? Sure it could.
But many of the crypto-currency fanatics think Bitcoin (BTC) could underpin the future of seamless global transactions, circumventing the messiness of more conventional cash payments (if you believe these are bogged down by banking bureaucracy). And some are saying that if Bitcoin were to become a standard holding as a hedge against risk, such as gold has been for hundreds of years, its value could rise dramatically ($100,000? $1 million?).
For those who need to catch up on what Bitcoin even is, check out this excellent overview.
And as if you needed any more evidence that this is, at the very least, a volatile investment, check out this caution of what could be in store when you hear the click-click-click of the roller coaster as it climbs the next hill.
If you know what you are getting into (specifically a risk profile that seems crazy, given the chance the bubble could explode at any moment), why not take a flyer with a small holding and join the ride?
There are various ways to do this, and I’m going with the Bitcoin Investment Trust (GBTC). Along with the recent ups and downs with Bitcoin itself, GBTC spiked to around $30 per share in December and is now trading around $16.
Speculation #3 – Legalization of Marijuana
Regardless of your personal feelings on whether marijuana should be legal or not (both medically and recreationally), the undeniable fact is that the wave of legalization is headed in only one direction.
As of the beginning of 2018, 30 states in the U.S. have legalized the use of marijuana in some form, including 8 states that have passed legalization for recreational use – most significantly California as of January 1. (General rule: if you can see the Pacific ocean, you’re good). Here’s a handy map to help you keep track.
As a result, sales of legal marijuana are expected to reach $7-$10 Billion in the first couple of years of legalization, according to Marijuana Business Daily (yes, there is such a publication).
Plus, Canada will likely go legal recreationally as soon as this summer, subject to final Senate approval. This could add another $2-$3 Billion to the aforementioned U.S. totals. Interestingly, they are already talking about labor shortages in Canada required to handle demand once the final law becomes effective!
And don’t you know it, several fairly large cannabis-specific companies have been established that are angling to take advantage of this tsunami. While I may be a little late to the party (no pun intended), with valuations of some of the bigger names already soaring, I believe we are in about the third inning of this long and potentially prosperous ballgame.
Most of the research on public cannabis companies has focused either on producers of medical marijuana or larger pharmaceutical companies developing cannabis-based treatments. These should both continue to grow as its use becomes more widespread, but let’s face it, the huge upside should be in pure plays on the greatly expanding recreational market.
I have found that a few companies dominate the public cannabis landscape, and it turns out the major players are in Canada. These include Canopy Growth (WEED) and Aurora Cannabis (ACB). Canopy has traded between $6.50 and $44 per share, with a recent price around $31. Similarly, Aurora has gone from under $2 per share to as high as $12, currently around $9.50.
With market caps of $6 Billion and $4 Billion, respectively, they certainly qualify as established companies. This article from Market Realist estimates that WEED and ACB are expected to command a 24% share of the entire cannabis market by 2021.
I’m willing to split my bet between these two and monitor accordingly.
“Fire at the Disco. Fire at the Taco Bell”
Speaking of risk, check out Detroit’s own Electric Six performing Danger!High Voltage! I saw them a few years ago, I think at the Fillmore. Their sly sense of humor even extends to their name (there are only five of them).
Speculation #4 – Artificial Intelligence
Do you see a trend here? Each of these speculative plays is backed by a small but fervent gang of capitalist evangelists that see the future much better than I do and offer a nice window into the possible Next Big Thing. And many say that is right at our doorstep in the form of Artificial Intelligence, or AI.
Now, the very nature of AI is that it cuts across nearly every major industry – energy, medical, banking, automotive – and includes the gamut from software to machine equipment. So how to invest in it can be very diverse and somewhat subjective. But I found two ETFs identified in this article (ROBO and BOTZ) that focus on AI with a distinct tilt toward robotics.
It turns out they have some overlap in holdings (i.e. the known industry leaders), with the biggest difference being that ROBO has a larger, more diverse number of companies while BOTZ is much more focused.
Like most aggressive tech plays in a red-hot market, ROBO has more than doubled in the past two years (from around $20 to $45 per share), and BOTZ has nearly kept pace ($15 to $27). And far from being thinly-traded newcomers, both of these ETFs have over $2 billion in assets.
If you want to further research individual AI stocks, you might start with each of their Top 10 Holdings here:
Speculation #5 – Small Biotech
Like each of the four ideas above (with the possible exception of Tesla), I’m no expert on these complex areas, let alone do I have any special insight into which specific investments are poised to take off. But I’ve always been intrigued by the outrageous potential for small biotech companies to develop life-changing drugs. These are being developed and tested every day, and I am particularly intrigued by the thread dealing with the human genome, or the use of genomics research to find cures for diseases (or preventions) at the molecular level. Just think if genomics, and the biotech companies that can master them, become the human body equivalent of the internet revolution!
A somewhat conservative way to play this is through an ETF such as the ARK Genomic Revolution Multi-Sector EFT (ARKG). By “conservative” I mean that the ETF spreads the risk across dozens of small companies, with its top 10 holdings comprising 51% if the total. It has returned 45% in the past year, so it’s not exactly a sleeper, but I think the appealing long-term future of biotech goes far beyond these fantastic short-term returns.
To be truly speculative (similar to specific AI investments above) I might want to try to find one or two companies to hitch a ride on beyond just an index of stocks. So, to that end I’ve found two that just might fit the bill: Illumina (ILMN) and Neurocrine Biosciences (NBIX).
Illumina is not a pharmaceutical company per se in that it does not develop drugs itself. Rather it provides gene sequencing technology that aids other companies in research and development. And unlike many other small biotech firms, it has actual earnings. Neurocrine develops treatments for neurological disorders (more a pure biotech company than genomic), whose earnings, while still negative, have beaten expectations the past couple of quarters and show some nice upward momentum.
Risk, risk everywhere you look, but what’s life without a little danger?
Maybe some of these are worth a slice of your speculative pie. As for my actual investments in these, I’ll be sure to keep you posted. (Subscribe to the GBC newsletter and I will provide updates right to your e-mail!)