Speculative Investing: Life Changer, Hobby or Hassle?

A friend recently commented how they were feeling blue for being on the sidelines while observing execs from a small gold company ride their stock options up to big $ winnings. He was down on himself for observing this ‘action’ and not having the moxie and initiative to be partaking as well. He was looking for some sympathy which I was unable to summon.

My take on speculative investing opportunities with potential for massive winnings (and losses):

• Incentive to participate in this arena is that a possible outcome is life changing money (being money that gives you choices you do not possess today).
• Capital that makes its way into these deals has acknowledged that earning 11%/year via a diversified and liquid index fund over the past 5 years is nice….but ultimately an unacceptable result. Money here is happy forgoing characteristics like transparency, liquidity and diversification in exchange for a chance at a super charged return resembling lottery winnings.
• In order to make a meaningful sum that can conceivably change the trajectory of your life, you must invest a meaningful sum. Here’s where things get very easy for me: I could never carve out a quarter, or half, of my portfolio to participate in a deal where permanent loss of capital was a possibility. Just plain not interested. Doesn’t strike me as a good idea (for me). And yes, people win at this sometimes, and I won’t be in the club.
• So, the pivot is to make a small investment. Only now if it goes up 20 times — it won’t change your life. So, you’re doing it for fun and acknowledge it’s very likely not a game changer if you win (you won’t retire 3 years earlier, buy your kids homes, donate 6 figures to a charity etc.). And here is where it gets really simple for me again: investing in a small venture that won’t change my life is around ‘low/medium’ on my personal fun scale. With only a finite amount of time to consume fun — for me that time is reserved for the ‘high / extremely high’ fun activities only. For some people, investing in high risk/high return deals is their definition of good times — and I don’t contest this assuming it works for them on a sunny Saturday afternoon.
• Often people collide with an ‘opportunity’ via serendipity and someone they know who is involved. Reminder in this situation: simply knowing someone who is involved does not qualify as a proclamation of ‘all clear’ re: free money. And yet, continued plodding with that boring portfolio can seem unbearable when you are close to an (alleged) surefire winner. Admittedly it is a very hard instinct to resist, which I have lived the reality of….and hence the purpose of my comments here.
• It’s a small control group, but in my 24 years I have seen some small private deals work great (pet insurance, a downtown warehouse, cannabis 1.0) while the vast majority have failed, or been a wash (apartment building partnerships, Howe St. junior ‘anything’, a knapsack company). And usually after the projected investment timeline has stretched from 3 years to somewhere north of 10. At which point fatigue and misery are the only lenses you can see things through.
• Small ventures being financed and flourishing in the world as their innovation creates value for people is capitalism at its finest, of which I am a big fan. Unfortunately, these types of investments often derail the life plans of their investors – many of whom had plans that could not absorb a meaningful loss, or prolonged lack of access to funds.

So chase the lottery outcome and speculate for fun —– but only if it really is, like….SUPER fun. Otherwise, compounding a sensibly diversified portfolio can free up a lot of time for the good stuff + get you where you need to be.