[su_quote cite=”Benjamin Graham” class=”wwd-post”]”An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.”[/su_quote]

Dear Member,

I have a great question you need to ask yourself today, one that will shape your wealth throughout your entire lifetime.

Are you an investor or a speculator? For me… I am a recovering speculator.

As a young man, I purchased a condo at age 18 just as the real estate market bottom was in, so you can imagine what happened over the next 9 years as we entered the largest bubble in history. In the mind of a young 20 year old, the evidence was obvious, I was a genius, or so I thought. I mean every house I bought in the early 2000’s went up $10,000 a month in appreciation; you have to remember these homes were all in Southern California so I was feeling pretty good about my investments.

That first condo I purchased was for $105,000 with a $3,000 down payment, in 2005 I sold it for $278,000, my return on investment ($3k) was 5,667%. Actually it may have even been a little higher since the tenant who occupied the unit paid down the principal and gave me some positive cash flow while I owned it. This of course lit a fire inside me, it gave me the desire and almost the need to see more returns like what I was seeing in real estate.

In hindsight this should have reminded me of my days as a 16 year old sneaking into Indian Casinos playing the slots, I was one of those unfortunate people who won big my first time there, well at least big for a teenager. I went with some friends, put in $5 on a slot, and out came a ticket for $375. Casino Morongo got me hook, line, and sinker! I remember leaving there thinking that I could turn this into my first job. By the time I was 17 years old I blew everything I ever made at that Casino, including the $1,200 I received in high school graduation gifts on the night of my graduation.

The point I am trying to make is that a lot of people I talk to treat the stock market, real estate rentals, and anything they get involved in as a bet. They have that mindset you get while gambling, you are only looking for 100 baggers (a gain of 10,000%) and that when down, you hold out with nothing more than hope that it will go back up so you can sell to get out.

Being a speculator is gambling, and if you are going to participate in this type of money making strategy, it should be extremely limited, I have given myself a personal limit of 2-5% of my entire net worth for these type of activities. A little can go a long way, but the most important thing to remember is you only speculate with what you are willing to lose.

Speculating Rules

  • Limit losses by doing extensive research, and never pull the trigger on something you haven’t given a few days of thought. If you feel rushed, YOU WILL LOSE MONEY!
  • Only use funds you are willing to lose.
  • Keep speculative bets down to 2-5% of your net worth.

I have seen so many sure bets people have told me about turn into nothing, especially in the micro-cap space in general. I know of a gold stock that traded as high as $10 two years ago, they had top management, institutional support, and a 20 million ounce gold deposit in the U.S., today they trade for 65 cents, down 94%! And this company had everyone getting behind it, the biggest names in the resource sector all owned it and were proud to suggest it. Forgive me for not mentioning this company, but in my analysis it has another 50% to go down from where it trades today, so I don’t want to mention the ticker, in fact I probably wouldn’t suggest this a speculative trade until gold made new 52 week highs.

If you are buying or funding something that does not have a proven rate of return, growth, or a reliable track record, then you are probably speculating. Any investment can go down, but can yours go to zero?

Let’s use Apple (AAPL) for example, on June 28th we profiled it to our Smart Money Members, at the time, the biggest objection we received from members was that it was too expensive at $396 per share. Now that is a big mis-conception since based on its price to earning, cash on hand, and business, it was actually extremely cheap at $396. The upside in my opinion is 3X your money at that price over the next few years. The best part about AAPL is it is safe, the share price may go down, but your investment capital is reasonably safe enough to consider this a long term investment.

AAPL as a company is not going away, their products are great, they now pay a dividend, are buying back shares, and will most certainly be around 50 years from now. This is a good investment in my opinion, but too many people have emailed me concerned about not seeing enough upside, they are looking for a lottery ticket. Lottery tickets get you burned 99.99% of the time, you are far better off at focusing your wealth building strategy on investments that are going to help you get rich slowly.

Next week we will discuss where 95% of your net worth should be, safe, reliable, income producing investments. Ones where you can sleep at night knowing you won’t lose any money.

For those of you looking for speculative trades, we have 2 we will be profiling in September, these are high quality businesses, but remember, they still fall into the category of speculative.

Smart Money Newsletter Update:

This weekend we will be releasing two extra income ideas, to receive them simply register here, it is free for the first 30 days.

Have a great week everyone.

Daniel Ameduri