The Speculator as Hero

In the popular mind, a speculator is someone associated with shortages, price hikes, wars, natural disasters, and other calamities. In reality, however, the definition of “speculator” is quite the opposite. Doug Casey explains…


The 1980s were the decade of the speculator – and now, 20 years later, we have such a window of opportunity again. Successful speculators should emerge from the first decade of the 21st century wealthy beyond their wildest dreams. Fortunately, it’s a profession open to all. No formal education, credentials, or licenses are required. All training is on the job, and best of all, the apprenticeship is “earn while you learn.” It’s an appealing job opportunity, but unfortunately one that carries a stigma.

I’ve been known to talk about a lot of suspiciously asocial concepts: financial crash, depression, hyperinflation, the alternative economy, hoarding. They’re all buzz words that arouse vivid images and strong emotions. Perhaps the most powerful word of all, however, is “speculator.” It sounds so irresponsible, opportunistic, and dangerous.

Politicians and the media throw the word speculator about so abusively, I suspect few people have ever dared to ask what one really is. A speculator is simply someone who sees, or anticipates distortions in the marketplace and positions himself to take advantage of them. He can do that because he understands their causes, and their effects.

Speculation will be the foundation of dynasties in the turbulent years ahead. The original Baron Rothschild knew how to profit from the politically created chaos of the French Revolution era. He became rich and famous by following his own advice to “buy when blood is running in the streets.”

That doesn’t mean the speculator is predatory; paradoxically, he’s a humanitarian. When people are desperate to sell their possessions, he appears with cash – the very thing they want most. When they change their minds and clamor to buy those things back from him during good times, he once again graciously accedes to the desires of the majority. The speculator, like any other worker, tries to give his employers what they want. Value is subjective, and the price at which something voluntarily trades hands is exactly what it’s worth at the time; the speculator simply gives value for value. If he wasn’t there to buy, perhaps no one would be, and sellers would be really in trouble.

Speculators: Betting on the “Sure Things.”

Somehow, speculators have gotten the image of careless gamblers charging about in wild, frenzied activity. It’s a totally inaccurate image, at least where successful speculators are concerned. Good speculations are always low-risk speculations. Far from taking risks, speculators only go in for “sure things.” They are rational and unemotional if they’re successful; the irrational and emotional who like to gamble and take chances don’t last long playing the game, and they soon become ex-speculators.

While simplistic, a useful way to view the methodology of the speculator vs. an investor is this:

An investor risks 100% of their money in the hopes of receiving a 10% gain. A speculator risks just 10% in anticipation of earning 100%.

If you are the least bit attentive, the longer-term risk/reward profile for the speculator is in an entirely different league than that of the “conservative” investor.

These days, while the chattering masses are frantically looking for safe harbors against the gathering storm, the speculator is accumulating positions in the quality gold companies. While gold is more in the news than it has been in years, the average investor still views it skeptically, thinking gold investors are somehow goofy.

As you’ll read below, that makes this a nearly ideal time to load up, though buying aggressively early last year when few wanted to know about gold was better… a fact that the subscribers to our International Speculator will happily attest.

Speculators: The Kiss of Financial Death

Investing for income is the kiss of financial death. Why haven’t any of the great millionaires of the past taken advantage of the simple gimmick of compound interest to eventually take over the world? (If the Indians had invested their $26 for the sale of Manhattan for a 5% compounded return, their money would be worth $2,790,729,193. today). It isn’t because they haven’t tried, I’m sure. It’s because no investment will give you a true 5 percent for even the length of a lifetime. In fact, there’s probably nothing that can be relied upon to yield even 3 percent over more than forty or fifty years. You might comment, “What difference does that make? I’m not going to be here that long.” But it does make a difference, because it shows the futility of trying to stay ahead in any type of “secure” investment. Everything is a speculation, whether people know it or not; those who settle for a low but “secure” return are penny-wise and pound-foolish in the most profound sense.

When you settle for a “conservative” return, even the slightest miscalculation, bad luck, or government fiat can wipe you out. Taxes will always erode your capital, directly or indirectly. Inflation, for the foreseeable future, is sure to get worse and fluctuate wildly as it does. Banks and insurance companies – the very institutions that have always gotten away with offering low yields because they were so stable – will fail as they always have… especially given the current overvaluation of most U.S. real estate and the underlying loans that are looking increasingly shaky.

The government itself will eventually be replaced and currency will become worthless. And there’s no way to truly protect against the risks of war, theft, fraud, and natural disaster. Investing for income – especially in today’s climate, when cracks can be seen in the foundations of society itself – is the height of stupidity.

If you invest for income, you’re handing over responsibility for your future to others. You don’t know what they’re doing with your money, you can’t know how intelligently they’re going to conduct themselves in the future, and you don’t even really know how sound their capital position is. That’s a bad enough set of fundamentals for a madcap gamble, but in return for a simple yield, it’s absurd.

What, then, to do? What is the method to overcome this madness? The only answer I know of is to lay a solid financial foundation, and then gather up your cash and your courage and learn the art of speculation.


Doug Casey
for The Daily Reckoning

November 02, 2005

P.S. Below you find some general rules of successful speculation, in summary. Decide for yourself how they match up with the opportunities present in gold and other resource stocks today.

Doug Casey is a best-selling author and Chairman of Casey Research, LLC., publishers of the International Speculator, one of the nation’s oldest and most respected publications dedicated to identifying investments with the potential to double or better within a 12 month time frame.

The markets are supposed to reflect all that is known. Day by day, hour by hour, minute by minute they react to the news, to opinions, and maybe even to the passing planets. In this sense, they are “perfect.” Nobody knows more than they do.

Which is merely to say that the markets are as imbecilic as the majority of stoneheads who invest in them. What is remarkable to us is that so many investors find nothing remarkable about today’s markets. The Dow is still where it has been for several years, while the majority of investors remain steadfastly bullish. According to Investors Intelligence, the majority has been bullish for 158 straight weeks, longer than any stretch since they began keeping track 42 years ago. You’d think they would get tired of being bullish – especially when it doesn’t pay.

If the market is perfect you can never go wrong by buying at the market price. That is, if you decide that a price is too high or too low, you are more likely to be wrong than right – because you will always know less than the market itself – which says the current price is the right one.

Obviously, the whole idea is empty. When an investor buys or sells, he is not really arguing with the current price, he is just guessing about tomorrow’s price. All the current price really tells you is what emotion has a grip on investors right now.

The emotion we see is reckless complacency. Gas prices have doubled. Is that a problem? Nope. The trade deficit has reached 6% of GDP. Is that a problem? Nope. There’s a war in Iraq that looks increasingly un-winnable…financed by borrowing from Asian rivals. Do you see a problem? Nope. American consumers’ earnings have been falling for the last two years, while their debt levels continue to rise. Does that bother anyone? Nope.

No, dear reader, there is nothing to worry about. Yes, debt levels are higher than ever, but this is a new era, in which people can support more debt – permanently. And the trade deficit? It has almost disappeared from the news. We’ve had a growing trade deficit ever since Alan Greenspan first stepped into the Fed. It hasn’t hurt us yet, has it? And what about consumers? Well, they may be earning less, but their houses are still rising. So, they still have money to spend. That’s what the markets are telling us. The markets have much more information than we do. And they say we can relax. The morons!

This seems like a good occasion to recall another new era, the one that came to an end almost as soon as it was first announced.

In 1965, the Dow began the year at 874. It took 17 years – until 1981 – for it to climb one lousy point to 875 at the close of 1981. Famously, Business Week heralded this new era in an article entitled, “The Death of Equities:”

“The U.S. should regard the death of equities as a near-permanent condition. Even if the economic climate could be made right again for equity investment, it would take another massive promotional campaign to bring people back into the market. The range of investment opportunities is so much wider now than in the 1950s that it is unlikely that the experience of two decades ago, when the number of equity investors increased by 250% in 15 years, could be repeated. Nor is it likely that Wall Street would ever again launch such a promotional campaign.”

Thus began a great new bull market in equities that lasted until 2000…by which time several new eras had been announced. In these new New Eras, stocks were supposed to go in only one direction: up.

In the following five years, the Nasdaq collapsed and the Dow fell; neither has yet recovered.

And now, in today’s New Era, we are supposed to be able to tolerate a much higher level of debt than ever before… indefinitely. That’s what Mr. Market is telling us. It was only eight years ago that the market in credit derivatives began. In 1997, the market volume reached $55 billion. Since then, it has soared to more than $4 trillion.

Only now is the market getting its “first test,” says the Financial Times. Many derivative contracts were based on Delphi corporate bonds. How will the market sort them out now that Delphi has gone bust? We will see in the next few days.

Yesterday, Mr. Market still seemed to smile on this brave new era. We wonder what will happen when he changes his mind.

More news from our team at The Rude Awakening…


Chris Mayer, reporting from Gaithersburg, Maryland:

“A ‘seismic shift’ is underway, Jim Chanos warned a packed house at last week’s Grant’s Fall Investment Conference in Manhattan, ‘and it will destroy the profitability of several well-known American companies.'”


Bill Bonner, back in France with more views…

*** To no one’s surprise, the Fed raised rates for the 12th consecutive time, pushing the benchmark federal funds target rate to its highest level since June 2001.

“All the changes coming for the Fed leave for a lot of uncertainties and that is something that gold often rallies on the back of – this time around it could be an exponential increase,” our commodities expert, Kevin Kerr, told MarketWatch.

At the same time, gold is testing the $460 level and may fall a bit further, he said.

“The yellow metal seems to snap back just as quick as it sees profit taking though, so the short side of the market needs to be cautious,” he said, adding that “traders need to see gold at these levels as a gift that we may not see for some time again.”

*** Mommas don’t want their babies to grow up to be cowboys or factory workers because there’s no money in it…and probably no future. The money is made in finance…on Wall Street!

One of the big changes in the last 30 years in America (and most of the developed nations) is that the rich are getting richer, and there is apparently less economic mobility. We are a little suspicious of the whole idea of mobility. We grew up in a house without running water much of the time. We were about the poorest people we knew. We can’t remember anything that would have kept us from getting ahead…except ourselves.

“But that was a long time ago,” said Elizabeth. “Now, it’s much harder to get into a good job. You have to go to a top business school to get a job at Goldman Sachs, for example. And you can’t get into a good business school without going to a good college. And it’s hard to get into a good college if you don’t go to the right secondary schools.”

We did not go to the right secondary schools; at the time, we didn’t even know there were “right” secondary schools. We just went to the local high school with the other sons of tobacco farmers and Chesapeake watermen. But it didn’t seem to make any difference.

We wonder, in fact, if all the time we spent in school was not a complete waste of time. We learn by reading, watching, listening and thinking. College seems like a way to avoid having to learn anything…by doing papers, taking tests and going to keg parties. This may not be true of engineers and scientists. But in our line of work, a college education may actually be a drawback. All it does is fill heads with whatever claptrap is popular at the moment.

“That may be true of you. But most people get regular jobs,” Elizabeth continued. “And regular jobs require regular credentials. I’ve actually spent a lot of time watching how it works here in France. The public schools do a fairly good job. But without a family pushing the student – by drilling him, bringing in tutors, and making sure he goes to a good school – the poor guy has a big disadvantage. He won’t do as well on the tests, so he won’t get into the best universities, so he won’t get the best jobs. It’s that simple.”

Both America and Europe have become more rigid, say the statistics. People at the top stay there, and earn more money. People at the bottom earn less (they are the major victims of Asian wage competition) and have less opportunity to move up.

In the last 10 years, writes our old friend Scott Burns, the percentage of national income earned by the lower half of earners fell from 15% to 14%. The top 25%, on the other hand, saw their portion raise more than two percentage points – from 62.45% to 64.86%. And the top 1% gained an average of $63,040 in purchasing power.

The poor people at the bottom made little economic headway. While earnings rose over the 10-year period, prices of energy, housing and health insurance soared. In the last two years, average earnings have actually gone down in real terms…with annual gains in income less than inflation.

*** Another way to look at this phenomenon is this:

When an economy is young, dynamic and open, anyone can get ahead. All it takes is luck and pluck, as they say. That is when the economy is growing richer, and people are producing things they can sell at a profit. But when an economy becomes old and rigid, it shifts from making to buying…from earning to borrowing…from G.M. to Wal-Mart…from Detroit to Wall Street…from manufacturing to finance…from savings to debt…from ability to status…from what you know to who you know…and from how much you’ve learned to where you went to school.

The Daily Reckoning