Avoiding the Extremes

You should obsess over risks that do permanent damage & care little about risks that do temporary harm, but the opposite is more common. - Shane Parrish, The Knowledge Project


Elliott Management, a leading hedge fund, recently published a market note stating "the beginning of the end of civilization as we know it."


Professor Jeremy Siegel, author of Stocks for the Long Run, believes if the Fed pivots, the market races higher and doesn't look back.


Which is it?


End of the world or booming equity prices?


Both are extreme viewpoints.


The further we go out on the edge, either bearish or bullish, the more we are at risk of becoming our forecast. It becomes baked into our identity.


We would ask those hanging on the fringes of doom or euphoria an important question,


"Do you want to be right or do you want to make money?"


I think this is the question for any investor with an extreme viewpoint.


We can stay balanced by studying market history and laying out core investment beliefs that help guide our behavior.


Your list might look different than mine, but here are my core investment values...


#1. I'm a student, not a guru


The longer I invest, the less I know. Ego is an investor's enemy. Humility and open-mindedness are an asset.


Seeking out opinions that challenge my viewpoints, rather than confirm them, can result in better investment decisions.


#2. Price is the best forecaster


People, including market "experts", can say whatever they want without penalty. I would rather listen to investors voting with their capital.


We call it taking our cues from the market.


#3 Risk management is vastly underrated


Ask an investor what their performance is during any given period and they will have a rough idea how they are doing.


Ask an investor how much risk they are taking and most will have little clue of the boogeymen lurking in their portfolio.


Without context of the journey (risk), you could be setting your portfolio up for a major blow-up. The worst part is that you might not even see it coming.


You can get ahead of this common problem by reading, "Is your Portfolio Drunk or Sober?"


In my opinion, most investors would be better off focusing on risk management as opposed to maximizing returns. This is especially true for retirees.


#4 Never mix investing and politics


The passionate D thinks the R candidate is going to crash the economy and markets.

The passionate R thinks the D candidate is going to crash the economy and markets.


Neither is a rooted in empirical evidence. Both are rooted in politically charged narratives.


#5 Be able to change your mind when the facts change


A good investor never lets a market thesis become their identity.


From our August 25th, 2021 blog "The Identity Leak,"


We see people getting their personal identities caught up in their investment strategy. This is a very slippery slope.


"I'm a value investor."


"I'm a growth investor."


"I'm a dividend investor."


"I'm a real estate investor."


"I'm a market bear. "


Identifying as a particular type of investor can leave one stuck, rigid, and inflexible to change.


Famous investor Paul Graham said, "Keep your identity small."


#6 The moment of crisis is always the worst moment


Unprecedented. The world is going to end. This time is different.


Every generation faces challenges.


Things get worse quickly. Things get better slowly. The world doesn't end.


Sure, refine your investment strategy, learn from your mistakes, and ask tough questions, but don't abandon a well-thought-out investment strategy.


Take a deep breath and accept that negative outcomes are a normal part of investing.


#7 Markets move in cycles


"Stability breeds instability" is the idea that as people feel good about current economic prospects they tend to consume, take on debt, speculate, etc. The risk-seeking behavior can create imbalances leading to economic instability.


Hyman Minsky, Professor of Economics, Washington University summed it up best, "All stable economies sow the seeds of their own destruction."


This principal works for investing too...


Good markets give way to bad markets.

Bad markets give way to good markets.


#8 Every forecast is going to be wrong; it's a matter of how wrong


Historical evidence shows Wall Street makes predictions that miss their mark by almost 13% per year.


Think about that. Every year being wrong by an average of 13%.


If the market's long-term average is ~7% per year, that's the equivalent of saying, "We expect the market to achieve a return between -6% to 20% this year."


That’s not forecasting, that’s wild guessing.


Quit seeking out forecasts, no one knows what happens next.


If you want some entertainment, check out our summary of Wall Street's predictions for 2022 S&P 500 price targets (most of these predictions were published December 2021).


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Most investors spend too much time worrying about unknowable things that are out of their control such as inflation, interest rates, the Fed, geopolitics, etc.


Instead, most would be better off asking the question, "How can I become financially unbreakable?"


By creating foundational investing principles, we can stay grounded and rational in any market environment.

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