Gold, Bitcoin, and Biotech?
Are you an investor? Or a speculator? It's an important question if you're buying stock or other assets.
I hear from a lot of readers out there in Wealth Daily-land, and you'd be surprised how many people like to say they are long-term investors, and then want to know why the stock they bought last week isn't up 20%.
I don't mean to be critical. I completely understand that when you take someone's advice and put your hard-earned money into a stock, you want to see results. I'm the same way, actually. When I buy a stock for investment or for a trade, I pick my spots. And I like to think a well-timed buy will get some quick upside.
Of course, it doesn't work that way. At least not all the time. Markets are inherently unpredictable. You can wait and wait, biding your time as a stock hammers out a consolidation pattern. The stock starts to move so you jump in, and then Kim Jong-un fires a missile over Japan, and the Dow sells off 200 points.
It happens, and it doesn't mean you made a mistake. The best stocks in the world sell off sometimes. This is why it's a good idea to decide whether you're speculating or investing before you take a position. If you're investing, you're buying a stock that pays a dividend. You're buying into a company that has a highly predictable growth rate, one that can be expected to beat the inflation rate. You reinvest your dividends, add a little when you can, and, over time, you will make money.
Speculating is different. In the must-read book Reminiscences of a Stock Operator, Jesse Livermore says, “The speculator is not an investor. His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in.”
By that definition, speculation gets a bad rap. To many people, speculating is just another way to say you're guessing. And if you're putting up some cash based on your guess, then it's gambling. But that's not exactly right. Speculating is better thought of as an educated guess about where an asset's price is headed.
You can't be 100% sure, but if Saudi Arabia stops pumping oil today, oil prices will probably rise today. And tomorrow. And the day after that...
Is Gold an Investment?
A lot of people will tell you that if you buy gold, you're speculating. After all, there's no real inherent value in gold. When you buy gold, you're making an educated guess that the price will go up in the future.
But gold has a relationship with the U.S. dollar. And as the dollar loses purchasing power through inflation, the price of gold tends to rise. Plus, when the macro environment gets dicey, gold prices tend to rise. We've seen that clearly demonstrated ever since North Korea started talking about nuking Guam.
Do we think this is a serious threat? No, not really. But gold prices have been rallying pretty steadily since early July. You can't bank on gold in the same way as a dividend stock, but gold serves an important role in any investment portfolio. It's a hedge against inflation. And it's a hedge against a stock market sell-off. Buy gold today, and it's likely to be worth more at some point in the future.
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So, what do we make of an asset like Bitcoin? You certainly can't value Bitcoin in relation to the U.S. dollar. Not yet, anyway. But there's also no denying the incredible run Bitcoin and other cryptocurrencies have enjoyed. I can tell you a lot of the youngsters here at Angel Publishing have made a lot of money by owning Bitcoin and Ethereum.
It's particularly interesting that Bitcoin has become sort of an alternative to gold. It has a bit more utility in that you can actually buy stuff with Bitcoin. And cryptocurrencies in general are gaining important acceptance in the global markets. The Chicago Board Options Exchange will be offering cash-settled Bitcoin futures sometime next spring.
That is a very important step. You can be sure the price is going to stabilize. And a whole lot more people will be using/trading Bitcoin. The problem is: at what price will Bitcoin stabilize? There is no way to know. And really, I'm not sure it's possible to make an educated guess.
Bitcoin isn't going away. That seems certain. Still, if you own Bitcoin, you're speculating on its future price, whatever that may be.
Speculate and Invest in Biotech
Back in June, I wrote about the results of a cancer drug trial for a company called Loxo Oncology (NASDAQ: LOXO). The stock recently gapped up from $49 to $70.
Yeah, the results were that good. Even after that huge jump, I told you the price was probably going higher. Because Loxo's drug is good. And what's a truly effective treatment for cancer worth?
We can try to put a number on it, but really, like with gold and Bitcoin, it's impossible to say.
Just a couple days ago, Loxo hit $83 a share. That put its market cap around $2.5 billion. The stock rallied (along with most other biotechs with a cancer treatment) after Gilead Sciences announced it was buying Kite Pharmaceuticals (NASDAQ: KITE) for $12 billion. That acquisition put all cancer biotechs in play.
I can't tell you Loxo is worth more than its current $2.3 billion valuation. But given that $12 billion price tag for Kite, it's an educated guess that Loxo's stock price will go higher.
Own some gold for protection, buy some Bitcoin if you want. But if you really want to speculate, biotech is a good place to be right now.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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