Money Track 4: Speculator

Making Money: Speculating

For this hub and for my last hub on money making, I am going to be extremely 'concise' because I believe that they are the WORST ways to earn a living. Speculators are more or less like traders but they do not have the appropriate risk management techniques that traders employ. Alright, it sounds complicated...let me simplify it! A speculator is either a very dumb trader or a very smart trader. A dumb trader is one who trades without a plan. When he feels that the stock will go up in price, he buys. If he is right, he wins BIG. If he is wrong, he loses BIG. So, yes, those who buy or sell stocks at the suggestion of a friend or based on the recommendations from some stock gurus without proper analysis is a speculator. Of course, we have smart traders! They are the ones who have done the analysis, very very confident of the results and throws in the money, hoping to win big with no exit plan. They either win big or lose big...but dont get me wrong, they are smart people who have done their analysis. George Soros for example is a very successful speculator.

Most speculators are, you got it right, hedge fund managers. Unlike traders, they do not only buy and sell in a particular market or base their decisions on a specific trading plan. They are flexible and their plan changes according to the situation. After all, this is what hedge fund is all about...you want to outperform mutual funds and index funds in all market directions. Of course, to do so, you will need to employ unconventional methods and to a certain degree, speculate.

But again, it is not all that rosy. Hedge funds can lose money too when fund managers get the direction wrong. Another group of speculators would be contractors or housing developers. They speculate...by assuming that house prices are always going to go up and up and up. And then, the housing meltdown ensued. How did that happen? Let me explain...in this case, everyone is speculating. House builders assume that the price is always going to go up. So, they build more and more houses. Banks are happily giving out homeowner loans and they actually LOVE to see their clients default because they assume that house prices are always going to go up. "No money for down payment...how about a nothing down loan?" says your happy local banker. And naturally nature takes its course, supply exceeds demand and suddenly no one is buying houses. The housing bubble bursts! And as predicted, your happy clients default because they take on the ARM mortgages. But now, banks cannot get rid of the house...

That is all I have to say about speculating. Of course, there are a lot more details involved in the hedge fund speculation industry but I would not delve into that aspect in this hub.

Related hub: Gambling