Reblog: Risk Is Not High Math


Smead Capital Management letter to investors  titled,”Risk Is Not High Math.”

Dear fellow investors,

Long term success in common stock ownership is much more about patience and discipline than it is about mathematics. There is no better arena for discussing this truism than in how investors measure risk. It is the opinion of our firm that measuring a portfolio’s variability to an index is ridiculous, because it is impossible to beat the index without variability.

We believe that how you measure risk is at the heart of how well you do as a long-duration owner of better than average quality companies. In a recent interview, Warren Buffett explained that pension and other perpetuity investors are literally dooming themselves by owning bond investments that are guaranteed to produce a return well below the obligations they hope to meet.

Buffett defines investing as postponing the use of purchasing power today to have more purchasing power in the future. For that reason, we see the risk in common stock ownership as a combination of three things; What other liquid asset classes can produce during the same time period, how the stock market does during the time period, and how well your selections do in comparison to those options. Why would professional investors mute long-term returns in a guaranteed way? The answer comes from how you define risk.

Continue Reading


Reblog: What a Complacent Investor Looks Like


During three separate interviews this week I was asked if I was seeing any signs of complacency among investors, markets, or clients.

If anything, the people I talk to are more concerned with the high probability of lower market returns in the future but my view is surely clouded by the clientele and readers I deal with on a regular basis.Whether my sample size is representative or not, measuring market sentiment is getting harder and harder these days. Everyone now has a megaphone to voice their opinions — social media, blogs, 24-hour financial television, podcasts, conferences, magazines, financial news websites, etc.I don’t see how you can reliably track sentiment when it comes at you every day like a wave that changes form and shape depending on people’s mood that day. There’s just not much signal in all of the noise anymore.Of course, investors have been given plenty of excuses to be complacent. It feels as though volatility and bear markets have been outlawed in 2017 and stocks in the U.S. haven’t seen a down year since 2008.Since I don’t see any reliable way to track the potential complacency of investors as a whole, I tend to look at different ways investors can be complacent depending on which type of market environment we’re in.For example, last month I read the Schroders Global Investors Study which surveyed over twenty thousand investors from around the globe to get their expected portfolio returns over the coming 5 years. The results show this group was a tad ambitious: Investors expect an annual return of 10.2% on their investments over the next five years, according to a major new study.The Schroders Global Investor Study (GIS) 2017, which surveyed 22,100 people from around the globe who invest, found millennials even more optimistic. Those born between 1982 and 1999 expected their money to make average returns of 11.7% a year between now and 2022.Older generations were more realistic. The Baby Boomer generation – born in the two decades after the Second World War – anticipated 8.6% a year.Millennials (born 1982-1999, aged 18-35): 11.7% Generation X (born 1965-1981, aged 36-52): 9.8% Baby Boomers (born 1945-1964, aged 53-72): 8.6% Silent Generation (born 1923-1944, aged 73+): 8.1%Double-digit annual returns over the next 5 years from current valuation and interest rate levels seems like a stretch to me. I could be wrong but investors with such lofty expectations after we just went through a period of above-average returns (at least in the U.S.) seems to be somewhat complacent to me.Here’s another example (although this is more delusional than complacent):
Continue Reading

Reblog: 12 Dumb Things New Traders Do


There are some common mistakes that the majority of traders make as they dive into trading before they have really studied what does and does not work. All new traders will find many of these things familiar. Some of us had to fight our natural impulses hard to overcome these bad habits.

A Dozen Dumb Things that New Traders Do

  1. Being a stubborn bear in a bull market. Continuing to sell short inside a strong uptrend not only causes the loss of money as a market makes higher highs but you miss out on the easy profits made buy simply holding positions or buying the dips.
  2. Being a stubborn bull in a bear market. Some markets are under distribution and keep making lower lows. If a market is not in an established uptrend or trading range then it can go lower if support does not hold. A stop loss gets you out of a downtrend.
  3. Risking your entire trading account on one trade. You should never risk your whole trading account and trading career on one trade. Safety comes in trading a small size so every trade is just one of the next one hundred trades not your whole future on the line. This is a poor choice financially and emotionally. It is also a sign of arrogance believing you can predict a non-existent future.
    Continue Reading

Reblog: 10 Things You Need To Know About Risk, Risk Management And Trading


I will start this piece by saying that I am not bullish or bearish, I don’t make market calls, or predictions and I don’t have opinions about the markets that I trade. I just follow my process, which is based on risk management, money management, price and moving averages. I lead off with this statement so that readers do not think that I am making some type of a market call by talking about risk management and downside protection while we are at all-time highs. I follow core concepts:

Respect price, respect risk and always be prepared for any outcome. 

With Global markets at or near all-time highs, and the money flowing in for many, now seemed to be an opportune time to remind ourselves that every day is a good day to focus on risk management. All of the greatest traders, Soros, Druckenmiller, Tudor Jones and Kovner, to name just a few, have a laser-like focus on capital preservation and risk management. They have all publicly stated that risk management and their ability to cut losses short is the cornerstone of their success. Paul Tudor Jones, a Billionaire Trader, is frequently the most quoted and has said:

“…at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control.”

“Don’t focus on making money; focus on protecting what you have.”

“I am always thinking about losing money as opposed to making money.”

Bruce Kovner, another Billionaire Trader, said in Market Wizards: “First, I would say that risk management is the most important thing to be well understood”.

With that being said, here are 10 key concepts regarding risk management that I focus on:

Continue Reading


Reblog: The Illusion Of Risk


When we find an attractive stock to invest in, we outlay money, aka invest, to earn an attractive return and the investment will involve a degree of risk.

One of the most dangerous, commonly accepted and ill thought out concepts in investing is the risk / return trade off.

That is: high returns equals high risk.

Unfortunately, Investopedia continues to spread this type dogma, as you can see by the graph below.

Illusion Of Risk

Volatility (standard deviation) is not risk!

The appropriate definition of risk is from the Oxford dictionary (or any other branded non-financial dictionary) as: Exposure (someone or something valued) to danger, harm, or loss.

Continue Reading


Reblog – Getting to Zero: Value and Risk Management


Why it’s valuable to calculate how your investment price can go to zero

Any time you manage other people’s money, risk management should be defined as preventing the permanent impairment of capital. Nothing can be riskier to an equity investor than losing all your money. Anybody who loses sight of this is – quite frankly – both a terrible fiduciary steward and value investor.” – Duncan Farquhar

In a recent article, Science of Hitting discussed the difficulty in adding to your position after Mr. Market plays havoc on the stock’s price and valuation. Making the decision to double down is tough for several reasons.

Continue Reading


Reblog: Market Strategy and the Biggest Risk in Stocks in times of high valuations


The original post is written by Mastermind, Sanasecurities and is available here.

Over the last few weeks, markets have beaten all resistance barriers and have defied the very notion of value. Those waiting for a correction sometime back have now jumped in hoping for newer all time highs.

Anybody who believes in value may not find much for the taking. Certain I am however that many old school value buyers are neck deep in stocks right now. Perhaps for the right reason given the enormous liquidity coupled with strong news flow both domestically and from international markets.

Markets are risky – more so at the kind of valuations they are trading at right now. Nevertheless, from positive earnings, passage of GST, U.S. Jobs data and FEDs almost certain stance of maintaining interest rates, everything looks positive.

If you are already invested, in all likelihood you would have made money over the past 2-3 months. The key question: If you are not invested, should you jump in now?

Continue Reading