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Investing in speculations: an oxymoron

Is that investment you’re considering an actual investment? Or are you speculating?

Are cryptocurrencies and marijuana stocks investments? How about a technology company like Tesla? I can’t seem to have a conversation without being asked about these types of companies, although the cryptocurrency discussion has declined with their prices.

Let’s look at the financials of Tilray, a marijuana stock, and Tesla.

At the time of writing Tilray stocks were worth $119.76. It has market value of $11 billion dollars, which is derived by taking the share price and multiplying by the number of shares. It has sales of $28 million or $0.30 per share. It has a book value (assets minus liabilities) of a whopping $0.38 per share. Therefore, it is trading at about 393 times annual sales, 315 times book value, and has negative earnings and negative cash flow, referred to as cash burn. Putting money into this company would be wildly speculative.

Tesla shares are at $289.46 which translates to a market value of $50 billion. Its book value is $22.90, and it has sales of $81 per share. Thus it is trading at 3.6 times sales and 12.6 times book value, much lower (better) than Tilray. However, it is losing $16.18 per share and burning cash at a rate of $1B every three months. Not as crazy as Tilray but still highly speculative. True to my Dutch and farming heritage, I’m not big on burning money!

Chapter 7 of my 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. 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 can rise and fall dramatically. Nobody knows how far they will rise and when they will fall despite supposed experts, buddies or drunkards 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, ultimately leading to failure.

The speculation category

Cryptocurrencies, marijuana stocks, some tech and many junior resource companies fall into the speculation category. Blockchain, the software behind cryptos, and marijuana will become industries but it is very difficult to determine ahead of time which companies will survive. Hundreds of dot.com companies were born in the late 1990s with the vast majority going broke.

As an example of the speculative fervor around blockchain, last December a failing beverage company called Long Island Iced Tea changed its name to Long Blockchain. Its stock price quadrupled from $2 to $8 in a day. It has since collapsed to 15 cents.

Better known Kodak announced that it was going to invent its own cryptocurrency, KodakCoin, and its share price also quadrupled from $3 to $12. It has since returned to the $3 range. The Kodak example illustrates a 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, they aren’t currently profitable, and their valuations have gone into the stratosphere.

I have tried speculations and failed, and have found being a true investor much more rewarding. I’m perfectly happy getting average annual returns of 10 to 15 per cent. 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.

About the author

Contributor

During a 35+ year career in ag sales and management, Herman VanGenderen became an active investor and stock and real estate, building portfolios in both. His latest book is “Stocks for Fun and Profit: Adventures of an Amateur Investor.” Visit his website at www.you1stenterprises.com or email Herman at [email protected]

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