Four Wealth Protection Lessons from 2008's Biggest Losers

by Louis Basenese

Last week, Forbes magazine released its annual list of billionaires. No surprise, the rolls shrank. “[In 2007], there were 1,125 billionaires. This year, it’s down to 793,” says CEO Steve Forbes.

An NPR broadcast tried to put an optimistic spin on the news suggesting, “All those empty spots… mean more room for the rest of us to move up.” In good fun, it even provided five secrets to do so, based upon the business activities that propelled 38 new billionaires into this year’s rankings.

But in all fairness, I don’t think a single one of us stands a chance of becoming a billionaire in the next year. So let’s put the Forbes list to better use than invoking a fanciful daydream about joining the lifestyles of the rich and famous.

Turns out, by focusing on the 10 biggest losers - who lost a combined $238 billion - the list contains four timeless investing lessons we can put to work immediately to prevent a similar disaster (in relative terms, of course).

Lesson #1: Have an Exit Strategy

While some can argue averaging down - buying more shares as prices fall to reduce your average cost per share - is a smart move, it’s stupid if you don’t ever stop. Just ask Carlos Slim Helu. To his detriment, he couldn’t resist buying more of luxury retailer Saks (SKS) or The New York Times (NYT) as shares plummeted.

Instead of endlessly throwing good money after bad, cut your losses and move on. It’s hard to do; that’s why we recommend using trailing stops. They take all the emotion out of the decision and provide much needed discipline to exit an investment gone bad… before it gets really bad.

Lesson #2: Don’t Try to Time the Market or Make a Few Big Bets

We know it’s tempting. But even Warren Buffett can’t do it. He admittedly “did some dumb things.” Atop the list is certainly his decision to plunk down $244 million on ConocoPhillips (COP) at the top of the oil market. Trying to make a fortune by placing a few big, well-timed bets is a surefire way to lose a fortune, not make one.

Lesson #3: Use Leverage Sparingly… Or Not at All

Russian oligarch Oleg Deripaska needed a $4.5 billion loan from a state-controlled bank to avoid a margin call by western banks on his 25% stake in Norilsk Nickel. Other margin calls forced him to raise $2 billion by selling his stakes in Magna International (MGA) and Hochtief. Leverage might magnify returns on the upside, but don’t forget it does the same thing to losses on the downside. And we’re not as fortunate to have a state-controlled bank to bail us out.

Lesson #4: Asset Allocate

This is akin to our parents telling us to “eat your vegetables.” We know it’s good for us. But that doesn’t mean we necessarily do it. Consider this your annual reminder because without exception, the 10 biggest losers on the Forbes list had almost all their assets in one basket.

Take Anil Ambani for example. His sizable investment in India’s Reliance companies (Communications, Power and Capital) made him last year’s biggest gainer and this year’s biggest loser, down $32 billion.

Granted, most billionaires can’t simply unwind their biggest investments. In many cases they’re in the business they created and they need to retain a large stake to stay in control.

But we can. So if too much of your portfolio is invested in a single investment, it’s time for a change. If we don’t invest too much (position size) in any one opportunity and spread our investments around widely (asset allocate), it’s impossible to be wiped out in one fell swoop.

Yes, protection is that simple. And while it might not be that easy for the world’s billionaires, it is for us. So use it.

Comments

[sr9web:]

Lesson #5 - Learn and master selling short
Lesson #6 - Learn and mater the art of portfolio preotection with puts
Lesson #7 - Sometimes, nothing works

Mar 19 10:27 AM