Are cryptocurrencies and marijuana stocks investments? I can’t seem to have a conversation on my book, without being asked about these two hot areas. Chapter #7 of the book is titled “Investment, Expense or Speculation: Which is it?” All three of these items are often called “investments” as this word evokes a more positive image than the other two words. The difference between “speculations” and “investments” is the huge difference in probabilities of success. The probability with true investments is very high, but with speculations is quite low, although sometimes a speculation can pay-off dramatically. This is the allure of speculations.
The nature of speculations is that they rise dramatically then fall dramatically. Nobody knows how far they will rise and when they will fall, despite supposed experts who profess to know. Speculations often end with buyer regret. Even if a speculator has a big windfall, they tend to re-speculate in the next hot area, in what I would refer to as gamblers syndrome. It would be extremely unlikely for a speculator to experience success twice in a row. What is unfortunate is that many, who try speculative stocks and fail, often give up on stocks altogether missing out on the markets tremendous wealth creation ability.
Cryptocurrencies and marijuana stocks, in my opinion, clearly fall into the speculation category. Blockchain (the software behind cryptos) and marijuana will likely become industries but it is very difficult for us smaller investors, and even larger ones, to determine ahead of time which companies will survive. Hundreds if not thousands of dot.com companies were born in the late 1990’s with the vast majority going broke. As an example of the speculative fervor around Blockchain, a failing beverage company called Long Island Iced Tea changed its name to Long Blockchain (LBCC) and its stock price quadrupled in a day. Better known Kodak made an announcement that it was going to invent its own cryptocurrency, KodakCoin, and its share price more than tripled. The Kodak example illustrates one big problem with cryptocurrencies. While Bitcoin supply may be limited, there is unlimited supply of new currencies just like in 1999 there was unlimited supply of new dot.com companies. As for marijuana stocks, I don’t think any are currently profitable, and their valuation has simply gone into the stratosphere.
I’m not about to tell anybody what to do, but I am an investor, not a speculator. I’m perfectly happy getting my average annual returns of 10-15%. I have found that reaching for more extreme returns usually leads to bad decision making. In my opinion you invest in investments, and you speculate in speculations. INVESTING in SPECULATIONS is an OXYMORON.