The future for today’s investor is bleak-bleaker than it’s ever been. While America enjoys a large middle class filled with prosperity, the system is unsustainable. More and more Baby Boomers are aging into retirement, and there simply is no money for an effective Social Security program. Couple that with the fact that America suffers the same problem that all thriving industrial nations are suffering from: low birth rates. There will be no Social Security for Generation X and beyond.
While the stock market is a great place to have your money, the reality is that it takes more real dollars today to buy food, shelter, and gas than it did just five years ago. So it is easy to extrapolate how much more expensive things can and will be 30 years from now. Today’s retirees will outlive their money unless they can have a viable investment alternative or somehow profit from the real dollar increases themselves.
That’s where speculation comes into play. Effective speculation puts you at the forefront of a move. It gets you buying Microsoft when IBM gave up on the personal computer. It gets you opening a hardware store at the beginning of a housing boom. It gets you buying an electric car at the first sign of oil prices rising. True speculation has you at the forefront of what will likely occur in the future based on the information we have today.
In order to succeed in these times, we need to make bold moves. Futures and forex speculation allow us to do just that. There is no real “investing” involved in these markets. They are fast paced, aggressive, and reflect the real world. There are only two ways to approach these markets-either you are speculating or you are gambling.
Speculation versus Gambling
Investopedia.com defines speculation as “the process of selecting investments with higher risk in order to profit from an anticipated price movement.”
Dictionary.com defines gambling as “to stake or risk money, or anything of value, on the outcome of something involving chance: to gamble on a toss of the dice.”
The average investor gets confused when he hears the words higher risk and assumes that higher risk means “chance.”
Dictionary.com defines chance as “the absence of any cause of events that can be predicted, understood, or controlled.”
I am not advocating that you should ignore that the risk exists or that you should give up traditional investing altogether, but for your money to not only survive inflation and thrive in the future, it’s a good idea to round out your investing style to incorporate speculation.
Gambling involves “chance,” which has no cause and effect, cannot be controlled, and cannot be understood. Each instance is independent of the last. Speculation cannot be considered gambling because you are making an informed decision based on all of the current information available.
Unfortunately, in order to move your investment attitude from that of a gambler to being a speculator requires hard work. Not everyone that comes to futures and forex investing is ready to put in the hard work that true speculation requires. The holy grail is constantly being sought after by would-be speculators. By looking for the easy route to success and not understanding the underlying fundamentals of the markets that they trade or are talked into trading, they are leaving their success up to “chance” and therefore are gambling their money away.
The beginning speculator will typically lose his entire investment within six months. Ninety-five percent of traders lose money trading. Eighty percent of options expire worthless. Time and time again these statistics are tossed out, but what do they really mean?
Pareto’s principle may hold true!
When it comes to options, the 80 /20 rule can clearly be seen: 80% of the options are sold by a handful of companies, most likely 20% of the market’s participants; they collect the bulk of the option profits available. The leftover 20% of options, while they may be profitable for the buyer, do not represent the same level of profit. The reality is that it is better to sell options as opposed to buying them.
A parallel can be drawn when it comes to trading in general. Eighty percent of traders will simply be on the wrong side of a trade. Therefore, as you meet people who have traded, you will come across more that have lost. They will have dire tales of buying gold when it reached $800 per ounce and seeing it tank all the way down to $300 for 20 years.
The fact that 80% to 95% of traders lose money trading may mean they are the gamblers; they leave their trading to chance. The remaining 5% are the true speculators. So just like the baby that crawls before he walks, walks before he runs, and runs before he drives, so must the investor learn to speculate before he trades.
Let’s Define Gambling Addiction
Gambling addiction comes in comes in two forms: action gambling and escape gambling. While I am no psychiatrist, I have never met a trader who was trading to get away from problems and emotional issues their lives. I have a tendency to believe that “reckless” traders are exhibiting symptoms of the “action gambling” type of addiction. Only you know your motivations, though.
Action gambling is defined as gambling in which the gambler is addicted to the thrill of risk-taking as his or her “substance of choice.” In trading, we know we can win big or lose big almost at the drop of a dime. This excitement can become like a drug. This “thrill-seeking” emotion has been likened to a cocaine or methamphetamine addiction. For the action gambler, the goal is to be recognized as the “winner.” For a trader, there is nothing sweeter than making a profit. While that may not be a problem in and of itself, what you do with your profits afterward may make all the difference.
Addictive gambling has been referred to as the ‘”hidden illness” solely because there are few physical symptoms. Nevertheless, it can cause major disruptions in your life-psychological, physical, or social. While gambling addiction is treatable, if left unchecked, it will progress. The American Psychological Association classifies compulsive gambling as a mental health disorder of impulse control. That is why it is so important for you to use a trading plan when it comes to entering and exiting trades. If you can reduce the number of random impulses, you help yourself step away from the potential of having your speculation turn into a type of gambling addiction.