<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
This is it \u2013 the finale of Supernatural Stocks. It\u2019s been a great run on Moneyweb and I\u2019m grateful to the editorial team for the opportunity.<\/p>\n
So where to finish this off?<\/p>\n
Over nearly two years, we\u2019ve covered many local and international stocks. We\u2019ve dealt with numerous concepts across sectors like banking, retail and cyclicals. And although we\u2019ve delved into technical discussions along the way, I hope you\u2019ve also realised the extent to which storytelling plays a role in equities.<\/p>\n
Listen\/read:<\/p>\n
Opportunistic investing \u2013 an oxymoron, or a smart approach?
\nSens and sensibility: Hunting for stock-pick treasures<\/p>\n
There\u2019s so much that has been done, and so much that could still be done. But in figuring out how to bring this to a close, I found myself writing various notes that all came back to the same underlying concept: risk.<\/p>\n
Without risk, there is no reward. And without rewards, there would be no point in participating in the market.<\/p>\n
Risk should be respected and understood, not avoided. You can\u2019t wrap your body up in cotton wool and waste your time on this earth.<\/p>\n
The same is true for your money.<\/p>\n
I therefore leave you with a collection of thoughts on risk, primarily focused on the distinction between avoidable and unavoidable losses.<\/p>\n
I also wish you all the luck in the world in your journey through the markets! Supernatural Stocks has been a pleasure.<\/p>\n
What is \u2018risk\u2019 anyway?<\/p>\n
In markets, as in life, things are hardly ever straightforward.<\/p>\n
Nothing is ever all good or all bad \u2013 instead, there\u2019s a spectrum of potential outcomes, both positive and negative. These outcomes have various catalysts along the way \u2013 some of which can be predicted, many of which cannot.<\/p>\n
This variability of outcomes is exactly why we talk about \u2018risk\u2019 in the market.<\/p>\n
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CONTINUE READING BELOW<\/p>\n
But risk of what, exactly?<\/p>\n
Volatility is the usual measure of risk, but is that actually correct? Should we really be worried about stocks going up or down in value on a daily basis, particularly if we\u2019ve done the right thing and invested with a multi-year time horizon? What difference does it make in your life if a stock fell yesterday and rises today, unless you traded those moves?<\/p>\n
Listen\/read:<\/p>\n
The risks of retail for investors
\nSpotting red flags in deals
\nMarket gifts: When bad prices happen to good stocks<\/p>\n
Risk of uncertain outcomes, perhaps? Not knowing exactly where your returns will end up? Sure, that\u2019s a risk, but it\u2019s hardly a disaster if your returns end up slightly better or slightly worse than expected. As long as you achieved a reasonable rate of return, you\u2019re smiling.<\/p>\n
But what about permanent capital loss? Isn\u2019t that the risk we should really be talking about? It\u2019s really hard for a portfolio to claw itself back from a major loss. If 20% of your capital is gone, you need a 25% return just to get back to where you started!<\/p>\n
If we approach this discussion through the lens of a long-term investor, then I would argue that volatility isn\u2019t the best measure of risk.<\/p>\n
With a proper financial plan in place, ideally with the help of an independent financial advisor, you should have funds available for life\u2019s little surprises.<\/p>\n
Unfortunately, if your emergency fund is your portfolio, then volatility can \u2013 and probably will \u2013 bite you really hard, but you also deserved that outcome by looking for trouble.<\/p>\n
Even without basic errors like not having sufficient emergency funds, it\u2019s easy for poor decisions or weak portfolio discipline to turn harmless volatility into harmful permanent losses of capital. These are avoidable losses.<\/p>\n
There are also unavoidable losses that are going to come your way in the market. Let\u2019s deal with that next.<\/p>\n
Unavoidable losses<\/p>\n
Unavoidable losses are a feature of the market, not a bug.<\/p>\n
Data tells us that markets go up in value over time, not down. Markets are just the average of all the underlying stocks in that index, so this means that most stocks go up over time, rather than down. But that doesn\u2019t mean that all stocks will go up, or that your stocks will go up.<\/p>\n
Even if you do things the right way, by holding a diversified portfolio of sensible stocks bought at reasonable prices, there are going to be a few names that bite you.<\/p>\n
The sooner you accept this reality, the better. If you beat yourself up about the one or two stocks that didn\u2019t work out, you\u2019ll drive yourself mad.<\/p>\n
The goal cannot be to completely eradicate losses. This just isn\u2019t possible in the market, as there are too many variables at play in global commerce. Instead, the goal should be to minimise losses by cutting as many avoidable losses out of your process as possible.<\/p>\n
For those who enjoy watching tennis, these are the unforced errors that players work so hard to reduce. If the market serves an ace right past you, or hits a spectacular winner down the line, these are just the realities of getting on the court against a good player. But if you hit an easy shot into the net, you\u2019re not really giving yourself a chance.<\/p>\n
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CONTINUE READING BELOW<\/p>\n
People do this with their portfolios all the time.<\/p>\n
Avoidable losses<\/p>\n
There are a few factors that tend to be at the root of most avoidable losses. Let\u2019s dig into them.<\/p>\n
The first is the decision to jump on the hype train. It isn\u2019t just market newbies who are at risk here \u2013 even the most experienced professionals are really good at convincing themselves that \u2018this time, it\u2019s different\u2019.<\/p>\n
Time and time again, markets dish up new technologies or ideas that seem to be a guaranteed way to make all the money in the world. In these hype cycles, the smart money gets in early and gets out in time. As for everyone else, it\u2019s a nasty experience that teaches a real-world lesson about market bubbles.<\/p>\n
As I mentioned earlier, nothing is ever all good. When markets have lost their minds and nobody is talking about the risks of a downward move anymore, it\u2019s likely that a downward move is just around the corner.<\/p>\n
But when does this become a permanent loss of capital, rather than just a sell-off and an example of heightened volatility?<\/p>\n
Listen\/read:<\/p>\n
Magnificent or meh? Navigating the tech turmoil
\nThe problem with \u2018just tell me what to buy\u2019<\/p>\n
Those who bought the hype and sold the crash would likely be locking in a decrease of 30% \u2013 or more \u2013 in their capital. The mistake here was to buy so high that the resultant sell-off is just too much to bear.<\/p>\n
With neither the financial muscle nor the emotional capacity to buy that dip, even if that might be the right thing to do, getting on the wrong side of a hype bubble can put an investor off the markets forever. It really is dangerous.<\/p>\n
The second element of avoidable losses that I want to touch on is the danger of poor research.<\/p>\n
It\u2019s easy to feel great when stocks are going the right way. It becomes a dark place when they go the wrong way.<\/p>\n
If your position was informed by a hot tip or something you read on the internet, instead of through your own research, then you\u2019ll be left confused and angry by a sell-off.<\/p>\n
You won\u2019t know whether you should buy more shares, or cut your losses and run away. You won\u2019t know anything, really, because you didn\u2019t do the work.<\/p>\n
If you\u2019re going to invest in single stocks, you need to develop a skill set around macroeconomic factors, valuation methodologies and bull versus bear cases. You need to go through the process of doing the research and getting a reasonable understanding of how this stuff works.<\/p>\n
This will help you steer clear of a lot of really damaging avoidable losses, as you\u2019ll stand a much better chance of distinguishing between a temporary sell-off and a permanent downward trend.<\/p>\n
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CONTINUE READING BELOW<\/p>\n
The third source of avoidable losses is lack of diversification.<\/p>\n
If you have a well-constructed portfolio that lets you sleep at night, you\u2019ll successfully ride the volatility more often than not.<\/p>\n
You won\u2019t panic about the stocks that do badly, nor will you be tempted to cut your best performers due to concentration risk.<\/p>\n
Listen\/read:<\/p>\n
Time to tee up in your portfolio?
\nThree strategies for a \u2018scare\u2019 market<\/p>\n
A further benefit to this approach is that you\u2019ll avoid the friction costs in the market. Trading fees aren\u2019t the end of the world, but triggering tax events by selling your winners means that you\u2019re losing part of your capital to tax.<\/p>\n
Tax is going to be payable eventually, but pushing it out to a later date means that you get the benefit of your capital compounding for a longer period.<\/p>\n
These are just a few examples of avoidable losses. There are obviously many ways to make mistakes in the market. Trying to minimise these mistakes is a really worthwhile exercise.<\/p>\n
Diversify, read and stay humble<\/p>\n
The markets are exciting. They reward good behaviour and punish bad behaviour. They turn paupers into kings, and sometimes kings into paupers.<\/p>\n
Through all the noise, there are certain approaches that are almost always a good idea.<\/p>\n
Be reasonably diversified and read as widely as possible \u2013 examples of good ideas \u2013 as you simply cannot rely on others to do all your research for you.<\/p>\n
And perhaps above all else: stay humble in the markets.<\/p>\n
If you haven\u2019t been taught a hard lesson yet, then that experience is almost certainly still coming your way.<\/p>\n
The ones who create incredible wealth over several decades are those who learn from these experiences and commit themselves to a process of continuous improvement and lifelong learning.<\/p>\n
We are all still learning. Thank you for learning with me over the past couple of years. I wish you all the very best in your investment journey.<\/p>\n
Listen\/read:<\/p>\n
Why guidance matters more than earnings
\nShould I stay or should I go? When to sell and when to reduce<\/p>\n
#Hype #poor #research #concentration #investors #biggest #risks<\/p>\n","protected":false},"excerpt":{"rendered":"
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