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posted on 07 March 2017

Our Job As Investors

Written by , Clarity Financial

Last week I reviewed 10-cautionary signs in the market which suggested that upside opportunity remains outweighed currently by shorter-term downside risk. While the market got a boost on Wednesday following Trump's speech to the joint session of Congress, not much changed in regards to the risk/reward equation.

As I stated:

"IMPORTANTLY, I am temporarily holding off adding new equity positions to portfolios currently until the risk/reward opportunity becomes a bit more favorable. With portfolios nearly fully allocated at this juncture, my bigger concern is focused on the numerator of the risk/reward equation."

That remained the case this past week. I reiterate this point to be clear that while I am currently monitoring the risk in the market, such DOES NOT mean I am "bearish" and sitting in cash on the sidelines.

However, given the action this past week, I did rebalance portfolios a little bit to bring in some of the gains in larger equity-based holdings.

With that said, a quick bit of history.

I have now been in the financial markets in some capacity since prior to the crash of 1987.

Yes, I am that old.

During that time I have watched investors repeat the same mistakes over and over again. From exuberance to fear, buying high to selling low, chasing returns, and always believing this time is different, only to once again be reminded it's not.

As the old saying goes:

"The more things change, the more they remain the same."

If you have been around the markets for any length of time, you can quickly spot the "pigeons at the poker table." These are the ones that continually rationalize why prices can only go higher, why this time is different than the last, and only focus on the bullish supports. Trying to "draw to an inside straight" is not impossible, it just leads to losses more often than not.

But therein lies an important point.

As investors, our job is NOT making the case for why markets will go up.

Read that again.

Making the case for why markets will rise is a pointless endeavor because we are already invested.

If the markets rise, terrific. We all made money, and we are the better for it. However, that is not our job.

Our job, is to analyze, understand, measure, and prepare for what will reduce the value of our invested capital.


If we are to accumulate capital over the time-span that we have available, from today until we reach retirement, the most important thing we can do to ensure our success is not suffering a large loss of capital.

Therefore, our job as investors is actually quite simple:

  • Capital preservation

  • A rate of return sufficient to keep pace with the rate of inflation.

  • Expectations based on realistic objectives. (The market does not compound at 8%, 6% or 4%)

  • Higher rates of return require an exponential increase in the underlying risk profile. This tends to not work out well.

  • You can replace lost capital - but you can't replace lost time. Time is a precious commodity that you cannot afford to waste.

  • Portfolios are time-frame specific. If you have a 5-years to retirement but build a portfolio with a 20-year time horizon (taking on more risk) the results will likely be disastrous.

With forward returns likely to be lower and more volatile than what was witnessed in the 80-90's, the need for a more conservative approach is rising. Controlling risk, reducing emotional investment mistakes and limiting the destruction of investment capital will likely be the real formula for investment success in the decade ahead.

This brings up some very important investment guidelines that I have learned over the last 30 years.

  • Investing is not a competition. There are no prizes for winning but there are severe penalties for losing.

  • Emotions have no place in investing.You are generally better off doing the opposite of what you "feel" you should be doing.

  • The ONLY investments that you can "buy and hold" are those that provide an income stream with a return of principal function.

  • Market valuations (except at extremes) are very poor market timing devices.

  • Fundamentals and Economics drive long-term investment decisions - "Greed and Fear" drive short term trading. Knowing what type of investor you are determines the basis of your strategy.

  • "Market timing" is impossible - managing exposure to risk is both logical and possible.

  • Investment is about discipline and patience. Lacking either one can be destructive to your investment goals.

  • There is no value in daily media commentary - turn off the television and save yourself the mental capital.

  • Investing is no different than gambling - both are "guesses" about future outcomes based on probabilities. The winner is the one who knows when to "fold" and when to go "all in".

  • No investment strategy works all the time. The trick is knowing the difference between a bad investment strategy and one that is temporarily out of favor.

As an investment manager, I am neither bullish or bearish. I simply view the world through the lens of statistics and probabilities. My job is to manage the inherent risk to investment capital. If I protect the investment capital in the short term - the long term capital appreciation will take of itself.

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