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On Speculating Properly

Posted at 2:27 p.m. EDT on Thursday, June 21

When you speculate, you are going to lose some money -- fact of life. It's just what happens.

The concept is alien to many people who speculate, though, and some do nothing but speculation. Unlike most others who talk and write about stocks, I have been adamant that speculation can be part of anyone's portfolio. I think it should be a part of it if you want to stay engaged.

But it can't be your portfolio.

Right now I am taking heat on four different speculative situations that have not panned out: Heckmann ( HEK), Key Energy ( KEG), Magnum Hunter ( MHR) and SandRidge Energy ( SD). People want to know why I have abandoned them, or why don't I buy them for my charitable trust, or why can't I push them on my venues.

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To all of these questions I say: These stocks are all calls on oil and gas. They are options on crude going higher. They are the most leveraged way to play the complex. If oil and natural gas go higher, these stocks soar. If it goes lower, they get crushed.

Oil's gone lower, alright -- much further than anyone I know thought could happen, and much further that I thought it could go. I figured it would stop at $80 to $85. I didn't see the collapse of all commodities coming because I kept hearing supply was tight for oil, and that China was a voracious user and that, as a result, oil had to go higher -- endlessly higher.

I believed it could come down partly because the Saudis don't want it to be as high as it was, as that encourages both alternative energy and drilling in the U.S.

Magnum Hunter and Sandridge aren't just calls on oil and gas. They are leveraged calls with gigantic drilling budgets, relative to their size, and each company has a desire to get big fast.

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