In today’s flash-in-the-pan investment world, the cover of the Wall Street Journal is constantly overwhelmed with news of the latest jaw-dropping buyout, real-estate fad or hedge fund return. Simply put, if you have a good deal of disposable income or a tremendous tolerance for risking money these days, high-risk, high-return investments are where you are laying down your bets. After all, for those with the stamina and cut-throat attitude risky investments require, the high-risk return is where the game gets exciting and where the big plays shown on SportsCenter, er… BusinessWeek come from.
Real estate speculation
Unless you’ve been squatting in a run-down shack on the moon, you know that real estate speculation has become rather popular in the last five or six years. Reason being, the market has been inflating at such an astronomical rate, purchasing land or property low and selling at a profit has become quite lucrative -- while very risky -- with returns of up to 100% not being uncommon. In this form of speculation, the name of the game is purchasing a home below its market value at a foreclosure auction or from an owner in the midst of financial troubles and then selling it in a few months -- yielding a return greater than any securities trading index will ever see.For an example that breaks it down to the basics, imagine buying a $10 house at a liquidation auction for $6. Once acquired, you make some improvements and then sell the house in three months for fair market value of $10. This means that $4 minus the mortgage, taxes and renovation costs is the net profit. In the end, walking away with $3 -- having invested $6 to purchase the property -- is a return of 50% in three months.
Hedge funds
In general, consider a hedge fund as a glorified investment club which -- unlike strictly regulated mutual funds -- is not regulated by any government agency. Investments can be broad or specialized in specific areas, such as commodities, real estate or public company buyouts. To give you an idea of the magnitude of this investment trend, Goldman Sachs Asset Management is among the biggest players in terms of money under its watch, with capital just over $21 billion; in fact, the firm’s Global Alpha fund exceeded 33% on returns after fees in 2005 (though the fund’s 10% loss in August 2006 re-emphasizes the high-risk nature of these funds).On the whole, hedge funds are able to outpace their investment counterparts, such as mutual funds, in terms of profits because managers have the ability to take short positions and move assets around very quickly with favorable tax implications. The flip side to that, however, is that with high-speed turnover strategies comes the risk of losing it all at the snap of a finger, should a series of bad investments ensue.
Emerging market investments
Emerging market investments can be just as rewarding as hedge funds and real estate. Specifically, emerging market investments have to do with putting money in corporations or development projects located within a foreign sate, such as Mexico and other less developed countries, seeking foreign investment. And in order to lure in cash from wealthier countries, these emerging markets promise volatile growth rates at better returns than are available in developed countries (in recent years, emerging markets experienced growth in the range of 52%, compared to 26% in Western countries).To get a better grip on how this form of investment works, let me give you an example: Let’s say my research leaves me certain that over the next few months, coffee crops will be in short supply and prices will increase. This finding leads to me to speculate coffee in an emerging market, such as Colombia, and I decided to buy a coffee futures contract for $1 American. Now, if my predictions end up being correct and six months down the road the market value of my coffee contract climbed to $3, I can sell my investment for a profit of $2.
the high road
Only with hands-on experience will the real “cowboy investor” learn when to hold ‘em and, likewise, fold ‘em. Don't believe me? Read any investment book written by one of the top gurus out there, they will collectively attest to the same thing. Unless saving your money includes stashing it away under the mattress, odds are that you will probably lose much more than win when it comes to high-risk investments, but the payoff of such a high-wire act, when it hits, can be huge.Resources:
http://members.forbes.com/forbes/2007/0129/056.html
http://www.bloomberg.com/markets/index.html?Intro=intro_markets
http://www.associatedcontent.com/article/32570/making_money_in_real_estate_speculation.html
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