The Vast Deception of Speculation

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He is the 30-year-old son of two Stanford law professors and graduated from of the Massachusetts Institute of Technology (MIT) with a degree in physics. His 28-year-old girlfriend is a Stanford graduate with a degree in mathematics and is the daughter of an MIT economist (mother) and an economics professor at MIT (father—who also is the former boss of the current head of the Securities and Exchange Commission). So far, so good. 

A persistent “bull market” in stocks. Massive amounts of venture capital available. He combines high tech, high finance, and cryptocurrency to offer speculators a way to trade crypto while storing their cash and digital coins securely. He hints at more regulation and oversight to lend greater credibility to a highly volatile non-security (i.e., bring maturity to an immature concept). Secures a $280 million investment from the most highly regarded venture capital firm in the world. What a story! 

Wonder kid. Face on dozens of magazines covers. Celebrity endorsements. On stage in grungy T-shirt, shorts, and sneakers with world leaders like Tony Blair and Bill Clinton. Drives a small Toyota. Makes huge contributions to powerful politicians who share his ideology. Pledges to give away all his wealth except a “meager” 1%—based on a new virtue fad called “effective altruism.” So modest, so virtuous. Wait—a $40 million mansion in the Bahamas? 

Then $40 billion in market value vaporizes in a matter of days. At least $1 billion simply disappears and can’t be accounted for. 

In contrast to Bernie Madoff, who stole billions of dollars almost exclusively from wealthy fools, the FTX punk I described (I won’t write his name) was an equal opportunity fraudster. Sure, Sequoia investors, Tom Brady, Steph Curry, and other very rich people lost billions. But billions were also lost by or on behalf of individuals with very modest wealth (the Ontario [Canada] teachers pension fund lost $95 million, for example). 

This whole episode is shameful. But like everything in our culture today that celebrates, promotes, and obscures illogic and foolishness under a shroud of “bigness,” there are countless individuals harmed in ways we never hear about. The deception of speculation reaches down from the very powerful and well-connected in the world of finance to infect all of us just trying to make a living and provide for our families by building and preserving a sufficient level of personal wealth (the Canadian pension fund is just a drop in the bucket). 

One of the most wealth-destroying, popular, and insidious forms of this deception is individual stock speculation. The statistical and commonsense proof of efficient markets is denied by the vast majority of the people working in the financial services industry. But I reserve my greatest disdain for financial advisors— those individuals filtered down from the bigness of our industry—who are paid to tell the truth and take care of those we ostensibly serve, yet do the opposite. In my opinion, individual investors who speculate on their own are just that—on their own. Good luck. 

So as an advisor who cares, what perspective can I share about speculation to help save you and your loved ones from destroying wealth unnecessarily? 

If you’re a young person who doubts what I say, set aside a relatively small portion of your savings in individual stocks. Learn from the results. Don’t just remember your winners and forget the losers. Calculate your total portfolio gain on a time-weighted basis and compare that to a market index. It’s virtually guaranteed you’ll underperform over time (direct loss) and lose the magic of compounding on those lost gains over the remainder of your life (indirect loss). At least the losses will be limited. 

If you’re older, you have diminishing time to earn more wealth through your hard work and for your portfolio returns to compound. Unless you are speculating with money that will not affect your or your family’s financial well-being in the future, don’t speculate. Own a very diversified portfolio with tilt toward stocks with higher risk and higher expected returns, such as small-cap and value stocks, and moderate risk with high-quality short-term bonds as appropriate. Hire a good advisor to keep you focused and disciplined, and rise above the crowd. 

I’ve included with this article an educational piece I created almost 20 years ago as a guide. With minor tweaks, it has stood the test of time. I hope it helps. 

Equius Partners, Inc. is a Registered Investment Advisor.

Past performance is not a guarantee of future results. The data and information set forth herein are provided for educational purposes only and should not be considered tax, legal or investment advice; a solicitation to buy or sell securities; or an opinion on specific situations – as individual circumstances vary. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate risk, including the risk of market or systemic loss.

Please consider the investment objectives, risks, and charges and expenses of any mutual fund and read the prospectus carefully before investing. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

© 2023 Equius Partners, Inc.

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