Here’s the paradox: the odds are overwhelming I will end up richer by aiming for a good return rather than a brilliant return – and sleep better en route.
And from Benjamin Graham;
The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept.
From John Serapere I would add;
I don’t remember hearing that when I worked at Fisher (for a few months in 2002) but long time readers will know that the above, even if worded differently, are cornerstones to my approach. The 75-50 refers to a portfolio strategy that targets 75% of the upside of the market and only 50% of the downside (do the math, it works).
In terms of people who read my site or others like it, many of you are do-it-yourselfers but may not necessarily be expert stock pickers (and you don’t have to be). The idea of going along for the ride during the up phases of the cycle and then being devoted to learning and understanding what causes large declines and seeking to take defensive action fairly early in the decline to avoid the full brunt of down a lot as I call it is not only valid, but I would say easier and places even less emphasis on stock picking which seems to be something many prefer not to do.
Another aspect to avoiding the full brunt of down a lot is it places less importance in being specifically correct while the market is going up. Generally speaking, I still believe that global equities (so choosing some countries correctly, and correctly avoiding some others) combined with a proper savings rate can get the job done for people with realistic ideas about spending. So if well selected countries can return 8-10% annually over the long term, that will include the booms, busts and everything in between. So just going long and holding on no matter what could work. For people, though, who do not want to see their portfolio cut half every so often who can take defensive action and either outperform by knowing when to get back in or can get to the same long term result with a much smoother ride even if they get back in “late.”
After a big move up people tend to discount the value of smoothing out the ride but I am telling you first hand (because people really do forget) there is panic at the bottom. If anyone is ever going to do the wrong thing it will be after the market, and by extension their portfolio, has cut half. For many people, avoiding the panic that goes with being down 50% could be a life/portfolio saver.
Yesterday after we parted ways with Pep (pictured with me at the ATM) we went to the town of Roslyn which is where the show Northern Exposure was filmed. This was one of my two all time favorite shows (the other being the shockingly profane Deadwood). The town is very much as it was when the show was in production. We got a bunch of pictures, needless to say. Dr. Fleischman’s office looks the same from the outside but is a gift shop inside. The guy who works there moved to Roslyn from New Jersey eight years ago because of his love of the show. I thought I was a fan until I heard that story. As a bit of hindsight bias, of course there was someone who rearranged his life for the love of the show.
We also got into Seattle and did some walking around. We hit Cafe Ladro at 801 Pine Street and they made a hell of a mocha.