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! 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 Editor, Money & Crisis |
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