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Driven by greed, people tend to speculate. However, when done on a gut feel without any due diligence, it is bound to go wrong. Image Credit: REUTERS/Dado Ruvic/Illustration

Driven by greed, people tend to speculate. However, when done on a gut feel without any due diligence, it is bound to go wrong.

In the list of human vices, speculation is listed as most indulging habit. Unfortunately, people don’t consider this as a problem. To speculate on anything to earn extra is rated as normal. Still, it is a problem.

With regards to investments, it does not necessarily need a specific skillsets. But there needs to be relevant insights, competent advice and credible data. People, driven by greed, overlook the underlying risks.

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Such actions typically turn into nightmares, leading to significant depletion of assets, at times wiping off the entire value. These decisions often emanate from a habit that people tend to indulge based on wrong perceptions.

Speculation is indeed dangerous… and sheer greed is worrisome. Even a routine business decision needs discipline and strategy. It may be the greed alone is not problematic - it is the lack of insight.

Go by the asset

Risk levels vary with each investment class, depending on the market, demand, and its fundamentals. In the case of property or gold, you may speculate with a higher risk appetite considering it is principally a tangible asset. However, for stocks and derivatives, it needs a fundamental risk review.

Same for currencies or commodities that are paper trades. Wisdom demands caution.

A routine business decision may go wrong, but at times, the root cause is misplaced greed. It could also be financial desperation that prompts people to indulge in it.

Get it right

First off, follow the fundamentals of investments, decide your objectives in line with cash flow and future income streams. Then, broadbase your finances by diversifying.

Keep the speculations confined to a minimum or the extent of extra cash available over and above your liquidity requirements. Its risk parameter demands booking your profits through capping, especially for those involved in intra-day trades where volatility and risk are high.

One must understand the do’s and don’ts of speculative trades. Do admit that at all times speculative gains may result in surprises. Market fundamentals cannot be ignored.

A thumb rule for prudent investment management is never to give the mandate to individuals or companies that are not competent— especially those wanting to speculate on your behalf. Only outsource on a condition when you have checked their credentials, their track-record and feedback from others already dealing with them.

It is essential while entering in any speculation - especially in currencies, commodities and stocks to understand its risk repercussions - and hedge to mitigate these.

- Tariq Chauhan is Group CEO at EFS Facilities Services Group.