Jumat, 29 Januari 2021

Risk Management, NOT Predictions, Is Where the Big Money Lies

Money & Crisis

January 29, 2021

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Risk Management, NOT Predictions, Is Where the Big Money Lies

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Graham SummersDear Money & Crisis Reader,

Perhaps the biggest lessons of 2020 were the discoveries that both life and how people respond to life are, in fact, extremely unpredictable.

After all, who could have predicted that 2020 would involve a pandemic in which the entire nation would be shut down, constitutional rights would be abandoned, millions of jobs would be lost, and hundreds of thousands of businesses would close, all for an illness with a survival rate of over 99% for any healthy person under the age of 60?!?

Predicting that was impossible. I spend hours upon hours every day doing research. I follow the most famed analysts/investors in the business. And I know of NO ONE who accurately predicted the events of 2020.

A few doom and gloom type analysts may have “called” the pandemic and market crash. But these are the same people who have been predicting a catastrophic depression and stock market crashes every year since 2008. They are broken clocks (who happened to be right for once).

As for the traders and fund managers who accurately predicted and profited from the March meltdown triggered by the COVID-19 pandemic, none of them profited from the market rebound. Every single one of them lost everything they made during the FIRST crash betting on a second crash while the market roared higher and higher.

Again, no one predicted the events and market reactions of 2020 correctly. There is a HUGE lesson for us as investors here.

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Making Money has Nothing to Do With “Predicting”

The longer I’m involved in the business of investing, the more I’m convinced that the BIG money is not made by predicting events, but rather on the risk management side of things.

As I stated before, I don’t know of a single investor, trader, or fund manager who accurately predicted the COVID-19 pandemic, economic shutdown, Fed policy response, and the market rising to new highs. Some people got some of these things right, but NO ONE got all of them correct.

However, with proper risk management, a buy-and-hold, long-term investor would not have NEEDED to predict any of those events in order to do well in 2020. He or she would simply have needed the discipline (risk management) to get out of stocks at some point during the crash, and then get back into stocks at some point during the recovery in order to do well.

This risk management didn’t even need to be particularly clever. If our hypothetical buy-and-hold investor had simply sold stocks when they broke below their 50-day moving average and then bought them whenever they moved back above, he or she would have not only avoided the crash, but would have done quite well in 2020!

Chart

Again, when it comes to investing, risk management, NOT predicting things, is where you make the BIG money. As Warren Buffett once famously remarked, the No. 1 rule for investing is “don’t lose money.” Rule No. 2 was, “don’t forget Rule No. 1.”

Note that Buffett didn’t say, “try to predict the next big thing,” or, “make astonishing investments.”

I mention all of this because we had a sell off this week that resulted in a lot of investors panicking and hitting the “sell” button. Stocks have since bounced back in a big way.

Those same investors, with proper risk management in their investment strategies, would not have been shaken out of their positions. Put another way, they would have kept their winners open.

And that’s how you make long-term wealth.

Best Regards,

Graham Summers

Graham Summers
Editor, Money & Crisis

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