by Scott Ronalds
If you’re a speculator, it’s your day in the sun. Not only have higher risk assets surged over the past year, but you’ve got a slew of shiny new products to pick over. From cryptocurrencies to special purpose acquisition companies (SPACs) to non-fungible tokens (NFT), there seems to be a new offering every week. And make no mistake, the majority of these assets are highly speculative.
Then there’s the new trend of meme stocks and online forums designed to hype sluggish companies and fuel their stock price. This ‘pump and dump’ strategy is akin to the shady days of the Vancouver Stock Exchange. A gambler’s dream.
It’s become hard to keep track of it all, even for an investment professional. Consider cryptocurrencies. While Bitcoin’s the big cheese, there’s also Ethereum, Tether, Polkdaot, Dogecoin, Stellar, Cardano, Litecoin, and Monero — plus thousands of others. No joke, there are now over 4,000 in existence.
Investing in a digital currency can be complex and cumbersome, but alas, you can now buy the ‘crytpoeconomy’ in the form of a stock. Just last week, Coinbase went public and flirted with a market value of $100 billion. The company, which allows individuals to easily buy and sell cryptocurrencies, has a value in the neighbourhood of storied financial behemoths Goldman Sachs and American Express. Amazing. (To be fair though, Coinbase makes decent profits).
We’ve written about many of these ‘next generation’ investments (SPACs being the latest), often with a skeptical eye. Our investment approach focuses on profitable, proven companies and it’s not our style to put our clients’ money at undue risk by investing in assets that are driven primarily by hype and sentiment. We named the firm Steadyhand for a reason.
This isn’t to say, however, that we simply disregard every non-traditional investment we come across. We put in the work to understand new asset structures and investment vehicles, as do our managers. But more often than not, they’re simply too risky for us. And while the short-term returns on several of these assets have been tantalizing, their values can turn on a dime. Many shirts have been lost betting on the next moon shot.
There’s nothing wrong with venturing into more speculative investments in your own portfolio, but it should be done with an abundance of caution. We’ve even suggested some guidelines to consider. Most importantly, such bets should be limited to a small portion of your portfolio. It’s worth noting, too, that it can be especially dangerous to invest in an asset following a period of eye-popping returns.
I consider myself to be a fairly aggressive investor. My own portfolio has a bias towards our two small-cap funds, knowing well that they come with greater risk. And while I’ve dabbled in a speculative stock or two, I still can’t come around to investing in crypto. The hyper-volatility scares me. One area I’m intrigued by, however, is alternative assets like collectibles. As a learning experience, I’ve been trying to build a small cache of fine wines. Problem is, they’re just too easy to open — proving once again that there's tradeoffs with every investment.
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