Download the Philosophy Page PDFIt’s about Risk. 


You should understand, and be comfortable with, the amount of risk you are taking in a given strategy. Unfortunately, very few investors today truly understand risk. There are a lot of ways to measure risk; standard deviation, alpha, beta, r-squared, but at the end of the day, most individuals do not understand these statistical measures of risk.  You should clearly understand how much money you could lose in a bad market.  This downside risk should be expressed as a percentage.  The question you should be asking is, if I accept this investment strategy, what is the worst case, downside risk?  The only way to estimate this downside risk is by looking at prior performance.  What was the worst performance for any 12 month period in the last 10 years?  The answer to this question is the key to finding comfort with the level of risk you take with your investments.


Always invest with the probabilities. 


Probabilities are about the mathematical estimation of a certain event occurring.  Everyone has ways of estimating the probabilities of the direction of the market.  Some are very rigid and precise and some are simply an aggregation of several different measures.  We believe the probability of a direction in the market is as much an art, as a science.   When determining probabilities, we look at a lot of different factors.  When those factors all point to one direction or another in the market, we know the probability is high that the market is going this way or that.   When those factors don’t all agree,  the probability is lower that you can predict the direction of the market.


You don’t always have to play. 


Be patient. Invest and take risk only when the probabilities appear to be significantly in your favor.   We were told when we were young children to always clean our plate, or to always finish the job, or to always include others when you play.  We were given this completion and inclusion mindset by our culture.  This same mind set has taken over the investment community.  Somewhere along the line, the investment community decided that you should always be invested.  Why?  If the probabilities are not in your favor or are not clear, then why should you invest?  The market goes up, down, and sideways.   When the probabilities are high enough that the market is going up, then you should invest in a way that profits you.  The same is true when the probabilities are high that the market is going down.  When the probabilities are high that the market is going sideways, just don’t play.  


Start with a STOP. 


Never take a big loss.  It is ok to be wrong … just don’t be wrong and stubborn.  If you are wrong, get out and reassess.   Too many advisors believe that once they take a position and it turns against them, they have to hold that position until they are right.  This is emotional investing.  While the market behaves emotionally, sometimes those that invest emotionally end up crying.  Those advisors who can’t admit they were wrong, have so much of their ego and pride wrapped up in their investment recommendations that they have to hold on until they are right.  This is a recipe for disaster.  We are not always right.  When we are wrong, we take steps to minimize our losses.   


Keep Score. 


Always have clearly defined and measurable goals.  Celebrate when you attain the goal and make adjustments when you don’t.  Unless you have an objective, you won’t know when you have succeeded and when you have failed.  Without success and failure, life turns into one big participation trophy.  The market is a zero sum game.   Someone wins and someone loses.  There are no participation trophies in the market.  This makes keeping score very important.  Without clearly defined goals and objectives... any results will do.


Interested in an introductory meeting to learn more? Contact us today.