The Lure of Speculation

Last month, I met a delightful young married couple at a vendor fair where I was selling my investment books for beginner and novice investors.

The husband, who I’ll call James, is a 32-year-old self-employed contractor, and his wife – I’ll call her Jenna – is two years younger and a stay-at-home mother, busy with their two adorable daughters under 5 years of age.

They stopped at my table, and James and I chatted.  I learned that they do not have a 401(k) account, SIMPLE IRA, SEP plan or Roth IRA.  Or even a decent balance in a savings account.  Nothing.  Nada.  Zilch.  Zip.

But that’s not the crazy part.

I explained to James the importance of investing, especially now when he and his wife are in their early 30s, so that time and compounding can be put to work in their favor.

“If you start now, James – not tomorrow, not next month but TODAY – $200 a month invested in an S&P 500 Index fund will grow to $424,000 in 30 years.  That’s because the compound annual growth rate of the S&P500 has been about 10% over the last 90+ years”.

“Just think, James," I continued. "When you’re 62 and getting ready to retire, you’ll have more than $400,000!  And that’s by investing only two hundred bucks a month.  If you can bump that up to $400 a month, you’ll have nearly $850,000.”

James didn’t seem too interested in the numbers.  I could tell he had something else on his mind.  And then came the crazy part.

“Yeah, I’d like to get into stocks,” he said.  “What do you think about SpaceX?”

“What do you know about SpaceX?”  I asked.

“Er . . . they go into space.  And my friend told me to buy it ‘cause it’s gonna be big!”

Translation:  he knows nothing about the stock or the company.  He doesn’t know that space exploration is not its sole business.  He doesn’t know what its revenues were for the last year and what they're projected to be for the coming year.  He doesn’t know its return on equity, its profit margins, if it pays a dividend . . . I could go on, but you get the picture. He doesn't know what he would be investing in. 

All James knows is that SpaceX sends rockets into space, and his friend told him to buy the stock.

And he’s not interested in learning anything more. He’s only interested in SpaceX because he heard this stock is going to be big and make him a multi-millionaire.  He heard that a $500 investment in Amazon in 1997 would be worth about $1.2 million today.  He heard that $1,000 invested in Nvidia in 1999 would be worth an astounding $5.4 million today!  That's what he heard.

Thirty-year long-term investing?  Nah!  He only needs that one explosive stock, one rocket ship.  And who’s to say that SpaceX is not it?  It very well could be the next blockbuster.  I certainly don’t know where SpaceX stock is headed, and I wasn't about to advise James on whether to invest in SpaceX or not . . . or any other individual stock for that matter.  I'm not a stockbroker or financial advisor, and I don't give specific advice about individual stocks. But I do know that having James invest in a single stock isn't the right answer. Why? Because it is highly unlikely that someone can predict how a specific stock will perform over the next 20 or 30 years.  After all, as Yogi Berra is often attributed as having said, “It’s tough to make predictions, especially about the future.”

There is room for a little speculative investing in many people’s portfolios.  But that comes after a foundation is established through steady, long-term investing in solid growth companies.  James isn’t anywhere close to that.  If he is intent on investing in SpaceX, or any other speculative stock, he should first establish a well-diversified investment foundation instead of banking his future and the future of his young family on a single stock.

His wife Jenna had been distracted by the kids and didn’t hear most of my conversation with James.  I called her over.

“Do you know anything about investing?”  I asked, holding up one of my books.  Her blank stare told me all I needed to know.

“Here,”  I said, “take this.”  I put my guidebook, Taking the Confusion Out of Stock Market Investing, in her hand.  “It’s my gift to you . . . under one condition.”

“What’s that?” she asked, hesitantly.

“Promise me that you’ll read it.  And then make sure James reads it, too.”

“I definitely will,” she promised.  With that, the lovely couple and their two children walked away to check out the Christmas ornaments and baked goods at the other vendor tables.

My hope is that Jenna and James read the book, adopt its concepts, and start investing sensibly and steadily.  Then, after their investing is put on auto pilot and their account balance is steadily growing year after year, I also hope James finds the next Amazon or Nvidia . . . or SpaceX. And his net worth soars!

But if he doesn’t find it, he’ll still have a core of solid investments to secure his future.