Making Risk Is Dumb

Taking investment risk is normal. We can learn a little if we look at the animals involved. Everyone knows about bull markets and bear markets and they know that bulls get rich, bears get rich and hogs get slaughtered.

That is not enough information.

People who own stocks and who make money doing so, (not the majority by the way) achieve their result because they have an advantage of some kind compared to the marketplace in general.

For example, Warren Buffet is a complete realist about business value, understands how markets work, is patient, and has a bigger than average capital supply. While, I don’t know much of his bad deals, I suspect he terminates them before they can do material damage.  Another version of realism.

Others have better information, better analysis tools, specific industry skills, longer than average time frames, better tax position, cheaper financing, the ability to find and trade one position against another, or the ability to add management and organizational value. Think Shark Tank.  Maybe a better advisor. Money is not the only variable you invest.

People who stay in the market when they cannot use their advantage tend to lose big. They cannot find a comfortable position. This frequently happens when the underlying rules change, (Like the Hunt brothers silver position in 1981) or when the “certain not to happen” event occurs, (Like Long Term Capital Management and the Russian debt default in 1998)  The resulting books are usually subtitled something along the line of, “I Was Right 100 Times And Only Wrong Once.” 

Learn to play at a time and in a market of your choosing. 

It is possible for you to have a bull environment when all others have a bear environment.  Your advantages make you money only when the situation is right.  Understand how you fit the market.

Bulls and bears do not describe all possible markets.  There is the Chicken Market.  That is the one that comes along and you have no clue about why the market is behaving as it is. You know it does not suit you.  So you sell everything and hold cash until you do understand.  Or at least, that is what you should do.

If you are making investments that do not connect to your personal advantage, or are buying securities just to be involved even though you you do not understand them, you are not only taking risk, you are making risk.

Not smart.  Not profitable.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

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