“There are an infinite number of ways of making money in the market. It’s just that everyone has to find his own way.”
– Van Tharp
I’ve written before about the difference between speculation and investing.
Investing is buying shares in a company for long-term financial returns.
These are the kind of long-term investments that made Warren Buffett a billionaire.
Speculation is trading financial instruments of all types with the hope of substantial short-term gains.
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For example, you can speculate on which pharmaceutical company among 487 will develop the coronavirus vaccine.
Of course, none of us knows the answer.
Still, careful analysis can tip the odds in your favor.
And if your bet is right, you can make a lot of money.
So in the spirit of smart speculation, let’s consider three key drivers of the market on our collective investment horizon: the upcoming U.S. presidential election, the spread of COVID-19 and the tech stock bubble.
The U.S. Presidential Election
With the 2020 U.S. presidential election still three months away, you may think it’s too early to position yourself aggressively for an outcome.
But it is worth thinking about.
After all, the outcome of the election will be a key driver of the market.
Conventional wisdom has it that it will be “Sleepy Joe” Biden who will occupy the White House come January 2021.
In the United Kingdom, you can bet on the outcome of sporting events, as well as U.S. presidential elections.
Punters have placed more than 53 million pounds’ worth of bets on U.K. gaming site Betfair. Biden’s odds are 61.3%; Donald Trump’s are 35.9%.
Others say the election is a toss-up.
Two U.S. election models – both with equally impressive track records – show contradictory results.
American University professor Allan Lichtman says his model, which identifies 13 key factors, predicts a Biden win.
Stony Brook University professor Helmut Norpoth’s Primary Model gives Trump a 91% chance of winning in an electoral landslide of 362 to 176.
But how can you make money from either of these outcomes?
Trump has been viewed as pro-business and pro-stock market.
A Biden administration would mean higher taxes (and lower corporate profits) but fewer trade disputes.
Whatever the election outcome, long-term options on the SPDR S&P 500 ETF Trust (NYSE: SPY) are the best way to place your speculative investment bets.
If you think Trump will prevail, buy long-term call options on the S&P 500 ETF Trust.
If you believe President Biden is in our future, buy long-term put options on the S&P 500 ETF Trust that will soar after a stock market decline.
A COVID-19 Vaccine
I’ve written about the challenges of picking winners in the COVID-19 vaccine race.
Two weeks ago, I even highlighted the four leading candidates as I saw them.
A successful COVID-19 vaccine is not a matter of “if” but “when.”
Let’s take a step back and imagine a post-coronavirus world.
Goldman Sachs argues that approval of any vaccine will mark a return to normalcy for financial markets.
That would imply the Fed and other central banks will rein in the trillions in financial stimulus.
That, in turn, would mean a sell-off in safe bonds and a rotation out of technology into traditional cyclical stocks and banks.
That may explain why Warren Buffett is buying up big additional chunks of Bank of America (NYSE: BAC).
And why the longtime tech bubble may be about to burst.
Tech Stock Bubble
Tech stocks have been the heroes of the COVID-19 pandemic.
I see three reasons tech has soared.
First, governments around the world have pumped trillions in stimulus into the markets. These efforts have helped push all asset prices sky-high.
Second, the technology sector proved its mettle by keeping the global economy from going off the rails.
Third, exchange-traded funds (ETFs) and passive index funds now dominate global stock markets. These vehicles buy up the tech stocks in response to investor inflows. They don’t invest based on any fundamental valuation.
So what will burst the tech bubble?
First, tech stocks are overvalued. Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN) and Microsoft (Nasdaq: MSFT) now make up one-third of the Nasdaq-100 Index while trading at around 35 times earnings.
Second, there is the recent rise of the retail trader. Armed with accessible trading platforms like Robinhood, retail investors have not been this active since the dot-com boom.
Novice traders have bid up the valuation of tech newbies like Tesla (Nasdaq: TSLA) to levels that defy all conventional explanations.
Third, history may not repeat itself, but it does rhyme. Traders of a certain age have seen this story before. And they all know how it will end.
They’re focused on whether they’ll have a chair to sit on when the game of musical chairs stops.
So which speculative investments should you make on the tech stock bubble?
A triple-leveraged bet on FAANG stocks through the MicroSectors FANG+ Index 3X Leveraged ETN (NYSE: FNGU) was a way to make a fortune on the way up.
An inverse triple-leveraged bet through the MicroSectors FANG+ Index -3X Inverse Leveraged ETN (NYSE: FNGD) will be the way to go on the way down.