Don’t confuse healthy speculation with desperation

Think back to the world before 2016. A world before Covid-19. A world where Donald Trump had yet to enter his first primary. Non-fungible tokens (NFTs) were in their infancy and special purpose acquisition companies (SPACs) seemed boring. GameStop wasn’t an investment vehicle but instead just a crappy little store selling video games. Can you picture it? I can’t.

That’s because the whirlwind of the past five years has changed everything. We’ve been stretched so far and dizzied so profoundly that we don’t remember how to appreciate a little calm, a little downtime, a little slack.

But now the noise of politics is abating. In some ways, the 24-7 news cycle is becoming boring. Trump has exited center stage. Big pharma is pushing out vaccines, enabling us to at least flirt with a sense of normality. Economically, we averted the worst potential scenario in large part because of stimulus checks. The irony might be that those same stimulus checks are morphing slack into sloppy investments, thereby creating the next existential crisis. 

Irrational exuberance

I’ve been in this business for 25 years, largely observing and reporting. I’ve seen bubbles. I recognize irrational exuberance. But in my adult life, I have never seen a more toppy market, which means it’s unsustainable. 

SPACs aren’t a panacea for wealth disparity. They’re just a way to raise money. NFTs are not even a real thing! GameStop is not an $11 billion company! But when there’s slack in the system, along with an insatiable appetite for alpha and central banks handing out cash, we get sloppy. We chase and assign unsustainable valuations that are destined to fall, leading to economic collapse, more federal bailouts and an opportunity to make the same mistakes all over again.

People, a little slack is OK. If your jeans are a little loose, you don’t have to binge eat. If no good movies are showing, read a book instead of seeing a remake of a bad movie. And if you have a little extra money you want to put to work, you don’t have to force it into something you don’t understand. Don’t get sloppy with a little slack. 

Desperate speculation

Don’t get me wrong, speculation is healthy. It’s necessary. It’s fundamental to capitalism because without it, no prospective business would have access to the financing required to get an idea off the ground. Speculation is betting on someone or something because you believe their product or service meets a need people are willing to spend their hard-earned money to buy. But what happens when there are no good ideas? 

There’s a difference between abundant opportunity speculation and desperation speculation. Opportunity speculation happens when the marketplace is flooded with good ideas, so money is aggressively spread out and diversified across a spectrum of potential. Desperate speculation is what happens when common sense and reason lose out to greed and conclusions predicated on false syllogisms. 

It’s easy to get caught up in the mania, especially when you’re surrounded by friends and family making quick money. Mom buys a SPAC and triples her money. Dad buys a meme stock, quadrupling his money. And grandma? Well, she bought bitcoin at $1,000, just divorced grandpa and is now dating someone younger than you.

You want a little of that. You might even believe you deserve some of that. But before you pull the trigger on something you don’t understand, ask yourself one simple question: Can you explain what you’re buying in just one sentence? If the answer is no, maybe hold off a second. 

Whether they’re SPACs, NFTs, meme stocks, cryptocurrencies or whatever comes next, there is always a pool of people willing to throw money at an idea. Some of those ideas are great. They will pay off far more than anyone ever expected. They may even become defining moments for you. However, most don’t pan out, and that’s why maintaining some discretion in speculating is the difference between successful investing and panhandling in a subway station.

If you don’t know what you’re ordering off the menu, you might find something new you like. Or you might be throwing away $50. If you’re speculating because there are so many good ideas out there and you hope to be part of one, great. But if you’re speculating because it’s what everyone else is doing and you’re just desperate to be one of the cool kids, well, you might want to begin scoping out high-traffic subway stops. 

Dylan Ratigan, veteran CNBC and MSNBC commentator and best-selling author of Greedy Bastards, serves as tastytrade global market strategist and co-host of the Truth or Skepticism podcast. @dylanratigan