While investing in the market is a little like gambling in a casino, when we invest part of our hard-earned nest egg, we want to tilt the odds in our favor before placing any bets.
At one time in my life, I was a student of the game of craps. When I placed a bet on the pass line, I could tell you the exact statistical probability of winning or losing on each roll of the dice. Of course, the odds of every game in the casino favor the house - otherwise there wouldn't be a house. Gamblers consider themselves lucky when they can hold positions called "true odds" - which is basically 50/50 - and that happens very rarely.
Craps - like a stock portfolio - allows you to hold several positions at the same time and can quickly get complicated. Each shooter ends the game on a roll of the dice, with the casino potentially hauling in all the money on the table.
In the recent Downturn Millionaires webinar, Rick Rule of Sprott US Holdings said: "Volatility and risk are not the same." Certainly, when we invest in a good company, the volatility of the market may cause the share price to fluctuate; however, if we know the company is solid, then the daily closing prices are nothing more than background noise. I seriously doubt Warren Buffett feels a need to check the price of his Coca-Cola stock several times a day.
At one point or another, I'm sure many of us have jumped into a stock hoping to catch a short-term trend going in the right direction. Though the rewards of this sort of investing can sometimes be very high, if you are a baby boomer nearing retirement or already retired, it's better to throttle your emotions and place small bets.
When the dice get hot and people around the craps table start screaming, normally rational people often get too caught up in the game. When the shooter finally sevens out, the casino takes in quite a haul. One of the most important lessons in craps is learning the discipline to keep from getting caught up in all the emotion.
Since joining Casey Research, I've been amazed at how Marin Katusa, editor of the Casey Energy Report, Louis James, editor of the Casey International Speculator, and Alex Daley, editor of Casey Extraordinary Technology, have all managed to have such phenomenal success in highly volatile sectors. How have they managed to take risks down to a manageable level and build such a tremendous track record?
As a quick example, in the October issue of Miller's Money Forever, I interviewed Louis James about the junior mining sector. At the end, I shared the track record of the Casey International Speculator with our subscribers:
"In the last ten years, it has recommended 359 positions; 280 have been closed, and the average gain is 107% over a time period of 24 months. What is interesting is that only 37% of its current recommendations are in positive territory, while the publication averages 60% winners. It gives great credence to the caution that, many times, after they make a recommendation, a stock will go down. In other words, despite a huge volatile market, where a good percentage of the investors lose all their money, Louis and his team have done a terrific job."
Is this what Rick Rule was trying to tell us?Risk Reduction Through Real Research
After I read a stock write-up in a non-Casey publication, I often forward it Vedran for his input. Vedran Vuk is the lead research and stock analyst for Money Forever and we're grateful for his ability to consistently pick winning investments for us. I've been surprised by the number of times he's had to explain misinformation that somehow gets published by other organizations.
One recent example happened when I asked him about a company that specializes in animal pharmaceuticals. The author (who appears regularly on TV) went on and on about the company and their superior research and development. However, Vedran read its annual report, which basically stated that its R&D is less than innovative. Instead, the company simply takes products that have worked on one animal and tries to tailor them to work on others.
So essentially, the company is just tweaking existing drugs for use on different species. That's an interesting strategy, but it's certainly not what the big TV personality was promoting. Vedran said to me:
"It happens all the time and the guy touting the stock should know better. The devil is always in the details with these things. What many people don't understand is that the research behind even big names in the financial press is often very shallow. You can't comment on fifteen different stocks every day and expect to really know what's going on in each one. Unfortunately, a lot of people are investing based on this sloppy research."
Wham! It hit me. That's why pure research companies are so valuable to individual investors. Vedran and his team thoroughly research every single recommendation in the Money Forever portfolio. We want our subscribers to know as much about a company, its products, and its industry as we do. The same holds true for the other Casey editors I mentioned earlier.
So what is my point? The best way to reduce risk in a risky world is to lean on competent professionals who know what they're talking about. I think Vedran said it best:
"Dennis, we look at the company, its management, and hundreds of other variables. Most of the companies we investigate never come close to making the grade. Once a company is good enough to be a recommendation, both the researchers and editors (after a required waiting period) are likely investing in the stock along with our subscribers. Our odds of success have to be well tilted in our favor before we will recommend it."
Rick Rule was right. The best way to minimize risk is to do the hard, challenging research, and then invest only where the odds are well in your favor.
In addition, we have an extra accountability factor. If a TV pundit touts a stock and it goes south, that is one thing. Tomorrow he will tout the next one. But when we add a pick into our portfolio, our subscribers hold us accountable. Also, we are reminded regularly when we check our own portfolios how well our picks are doing.
While I read as much as I can, I pay a lot more attention to a recommendation that is going into the author's model portfolio as opposed to a cool, one-page article about a company that sounds like it was written by its marketing department.
In the same discussion with Vedran, he was quick to mention that picking a solid company is the first step toward reducing risk in a volatile market. What happens if we have a lot of money tied up in junior mining stocks or technology stocks and the volatile market turns in an ugly direction? Much like the craps player who has multiple bets on the table, we might take a beating if we are too heavily invested in one sector.
For our subscribers who are baby boomers saving for retirement, or for those already retired, we focus quite a bit on sector allocation and conservative investment strategies that give us maximum upside with little downside, like our 20/5 rule so that no more than 1% of our portfolio is at risk.
Retirees can't afford to get hammered when one sector takes a hit. And even if you're a few years out, do you really want to risk having to work several more years when your portfolio takes a beating?
Good companies with good products and top-quality management will follow the market, but have a history of recovering quicker than most. Meanwhile, spreading our capital among sectors and limiting our bets gives us an additional hedge against volatility.
So how can we reduce the risky part of risk? It's pretty simple. We either do the research ourselves or work with trusted research professionals who can guide us through the process. Let the TV characters create the hype and emotion; they are geared for entertainment. The true professional research newsletters are comfortable doing the heavy lifting. I will continue to rely on the latter to help me understand where to place my bets.
With every issue of Money Forever both Vedran and I earn the trust of new readers and keep the trust of those who have been with us for a long time. That trust is earned by our continued commitment to bringing you the very best, unbiased, thoroughly researched investment recommendations to consider for your portfolio. We don't take this lightly; we know many of you have retirement money in play and cannot afford to take on undue risk. With that in mind I'd like to suggest you give Money Forever a try - "test drive" it for 90 days, risk-free. If you like it, then just keep getting every issue, every update, every special report, and every recommendation. But if you find it's not right for you just call or email us during your 90 day " test drive" and we'll happily give you a full 100% refund. Click here for more.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.