“The biggest risk of all is not taking one.”
Mellody Hobson, CEO Ariel Investments (Chairwoman of Starbucks Corp; wife of George Lucas)
On a recent Friday morning I had to drive in to downtown Chicago.
The street I was driving on was also filled with bicycles (human powered), bicycles with electric power, scooters with electric power, all going at a high rate of speed and paying no attention to lanes or lights.
Then add in the pedestrians and, of course cars and buses.
It was truly a nightmare as you try to look right, left, in front, in rear view mirrors, side view mirrors and constantly scanning the street and the sidewalks as everyone was darting through and around the traffic.
Yes, even pedestrians get in to the free for all of city driving.
I wondered why these people would take such huge risks. If they don’t care about their own safety, how about thinking of the safety of others?
If a driver has to swerve to avoid a fast moving scooter, another person on the road could be seriously injured.
There is the risk we see, and perhaps ignore, and the risk we don’t see.
Learning to face risk directly
It reminded me of a video I saw several years ago.
A very successful Trend Following investment manager, Salem Abraham, was describing taking his children for a family bike ride in a desert area near their home in rural Texas.
After all the kids, aged about 3 to 13, were suited up and ready with bike helmets in place, he looked intently at each child and asked ‘when we go on this ride, what could hurt us?’ They gave various answers like ‘I could hit a rock and fall off the bike and maybe break my arm or leg.’
Then he asked again, eyeballing each one, “what could kill us?’ The answers included ‘we could get hit by a car or get bitten by a snake’.
And then he asked them what they could do so those things didn’t happen.
When I first heard the story, I was shocked. It felt like he was deliberately scaring his kids.
Maybe. But he was also imparting a critical lesson.
He wanted them to think about and recognize risk and what they could do to avoid bad outcomes. He wanted them to know that they needed to be aware and that they could be in control by having considered the outcomes in advance.
What a gift he gave his children! Here is just over a minute of that video. My apologies if you have to skip an advertisement at the beginning of the video.
Think of how many kids today have died of drug overdoses, high speed car accidents, or being with the wrong person at the wrong time.
They never learned, from a young age of the risks, that there really are things that can hurt you and things that can kill you. And that you can recognize them, take them seriously and avoid them.
Risk is Everywhere
Risk is all around us and conscious, “situational awareness” is very important.
As investors, we also have to consider risk. There is risk in investing and there is risk in not investing.
Financial advisors ask clients about their tolerance for risk. Most people, myself included, want big returns with virtually no risk. Now, that would be sweet! Not happening.
And yet, in 2006 Chipotle became a public company at $22/share. Recently, it’s stock price reached $3,283 (!) and split 50 to 1 a few weeks ago! Incredible. Does not happen every day. And, I didn’t own it.
It may be surprising that an investor does not always have the same Risk Tolerance across all of their investment choices.
An investor may express to their advisor that they are very risk averse and then purchase a stock based on a tip from a friend or from a TV ad.
It is important for investors to recognize, consciously, and have “situational awareness” regarding their investments. Is the stock currently trending? What does that trend look like?
In other areas we plan for ‘extreme events’ – with seat belts, smoke alarms, insurance (fire, life, health).
Negative events in the stock market happen more often than the house burning down.
How have you ‘protected’ yourself in that more likely event of a Market meltdown?
According to Salem Abraham, you don’t have to fear risk but you do have to Respect it and have to plan for it so it doesn’t take you out.
If you invest you Will have losses. You don’t want them to be catastrophic.
It is almost impossible to grow wealth in the Market without managing risk.
In Trend Following, the emphasis is on Risk Management as much as on growing wealth. You can’t really grow wealth and keep it, without managing risk.
Protecting ALL your assets
You know the importance of compounding and the time value of money.
What if the Market cratered and the value of your investments dropped 60-80%?
This happened to us in 2000 and again in 2008. We were heavily invested in tech stocks. It took years to recover and some stocks never did.
Our investments were left ‘unprotected’ because we were basic Buy and Hold investors and didn’t know any better. We were busy working, growing a family, etc.
Those investments were more ‘valuable’ than our house and in Salem’s words, were left unprotected. What an eye opener.
When we discovered Trend Following, with its emphasis on Risk Management, we had a new mission – invest in trending stocks – protect the downside – cut losses – let winners run – repeat.
And tell as many others as possible to consider the Trend Following strategy.
The great thing is Trend Following does Not have to replace investing based on fundamentals. They can work beautifully together. Stocks Trending with great fundamentals while managing risk? Now that really is sweet.
Remember, you have not eliminated risk. The only way to do that is to not invest in the stock market at all.
In that case, you have exchanged one risk – loss in the stock market, for another – not having enough capital (aka money) in the future for retirement or other important needs.
But wait!
What About Real Estate?
You could invest in real estate instead of the stock market, right? Of course. Great idea.
And what is the first thing you will do in the process of buying that property?
You Will Insure It!
You will manage the risk of bad things happening!
When investing in the Stock Market
If you decide to invest in stocks, consider this – 1. You will have losses. 2. Do what you can to make them small or at least reasonable by your own definition and risk tolerance.
Here are 3 ways to manage risk. There are others.
- buy multiple stocks – spreads risk so that one stock’s decline doesn’t have big impact.
- from multiple Sectors – reduces risk based on one sector’s decline.
- Use Stop Loss Orders – limits the dollars at risk and helps manage downside risk.
Numbers 1 and 2 spread risk across multiple entities so that no one stock or sector will take you out. Number 3 can help limit the amount of loss.
The TrendingStocks.IO Platform can help by providing easy reports on stocks trending across all Sectors, calculates stop loss based on recent volatility and more.
Conclusion
Think about those most important areas of your life, in addition to investing, and ask yourself how you are caring for them. How are you managing any risk associated with them?
For the investing area of your life, you might want to check out a previous The Trend, Managing Risk in a Crazy Volatile Market. Or how about the 4 Week Free Trial at TrendingStocks.io! Comments? Just hit reply.
And don’t forget – Ride Your Winners and Cut Your Losses!
