Some wildly speculative froth in one corner of the market caught the news last week and opened a window onto the world of day traders, trading platforms and internet chatrooms, overlaid with some wonderfully inaccurate comment about how the hedge fund ‘Masters of the Universe’ had been laid low.

It made great copy but probably left most investors wondering what to make of it all and, just as with the Bitcoin frenzy of the past few months, left others with a heightened sense of FOMO.

Let me put some fears to rest and highlight some dangers based on my career as an investment professional across the financial markets through to my time as a discretionary portfolio manager for Church House Investment Management’s clients.

Often in the early stages of working with a new client and the discussion of how to protect and manage their savings and investments, a client will confess to a private ‘punting’ portfolio established on a low-cost platform.. Oft as not, it has been in abeyance for a while, usually harbouring a rag-bag of short-term punts that ended up as long-term recovery hopes.

Some clients understandably like the idea of retaining a bit of trading control or access to market excitement; I am always at pains to encourage this. Apart from engendering a mutual interest in markets it puts my job of building a logical, long-term investment strategy in useful contrast.

Ideally, we are entrusted with managing the long-term ‘sacred’ family financial assets under an agreed mandate with clearly defined (and well-understood) risk parameters. The client can retain a ‘play’ portfolio on the clear understanding that he or she can afford to lose everything in it without impacting these sacred assets or their wider financial responsibilities.

The risks involved in short-term speculation were never made more clear than last week when several companies like Robinhood had to deny their trading apps to punters in stocks like Gamestop, AMC and others. Without going into the technicalities, all trades have to be settled on an exchange. If there is a sudden surge in activity on one side, i.e. the buying or selling of a share - especially in a company with a small market capitalisation and a limited pool of available stock - then this is not only justified but required by regulation until an orderly market in that stock is restored.

Few outside markets understand this ‘liquidity risk’ until they fall victim to it. Indeed, many professionals were badly bitten during the Credit Crunch of 2008/09 when markets seized and trading in certain stocks became near-impossible.

The dinner-party companion who boasts of a double-digit percentage gain in some penny stock rarely enjoys confessing to the losing punts that will have invariably preceded their ‘winner’.  Luck and momentum will usually have more to do with it than any fundamental value analysis.

Short-term newsflow or even just a politician pronouncing unexpectedly can cause massive volatility. If you want to really frighten yourself, just zoom into a live feed of the £/$ exchange rate on any trading website (lots are free) while the Chancellor is at the Despatch box during Budget day next month and watch the fun. Some people try to make a living trading this volatility. They don’t tend to live for very long.

Many new clients are initially surprised by the stress I place on the importance of protecting the downside and analysis of what could go wrong. In other words, our essential focus on capital preservation, perhaps expecting more conversation about the great winners that have been spotted early.

Similarly with Bitcoin. If there isn’t a stream of productive earnings on which some logical valuation can be anchored, then it is not going to appear in one of our investment portfolios. Crypto-currencies  and other speculative ‘bets’ are for that play portfolio. When clients see the graph of the last twenty years with its many illustrative crashes and recoveries, they soon begin to understand the value of this fundamental approach, especially in relation to their hard-earned money or sacred inherited capital.

In short, it is just another way of telling the age-old fable of the tortoise and the hare. Or highlighting the well-proven merits of building wealth slowly versus the adrenalin rush of losing money quickly.

Important information

The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment decisions. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future. performance.