Morning Market Thoughts
Good morning. Today is the 30th anniversary of the 1987 market crash — Black Monday. It actually happened on October 19th, but what difference does a few days make? It was on a Monday. When I think about Black Monday, one word comes to mind: Risk. Here are a few thoughts:I wasn’t trading 30 years ago. I was in the homebuilding business because real estate was booming. I remember driving to work with a buddy of mine when we heard the news on the radio. I remember him looking at me and saying, “Well, aren’t we glad we aren’t in the market? That’d never happen with real estate.” (Of course, 20 years later, it absolutely did happen to the real estate market — it just happened over a period of years rather than hours.)
There is risk in any investment you make. That’s just the nature of making money. When you have a job, you are trading your time for money. You are paid for your work…AFTER you’ve done the work. There is always a risk that you won’t be paid for your time. Bonds are considered “safe” investments. They don’t pay very much, and that’s because they don’t have much risk. But ask Puerto Rico bondholders how they feel? The high yield they signed up for was because of the increased risk of not being paid. But as it turns out, the high yield still wasn’t enough to account for the risk. They’ll collect pennies on the dollar.
So there is risk in investing in stocks, real estate, bonds and even time. The one thing they all have in common is that we want to make money for putting our assets at risk. There is no “sure thing” when taking risk. If there were, then it wouldn’t be risk, right? Have we learned anything from the 1987 crash, the popping of the real estate bubble, or the blowup of bonds in Puerto Rico. I doubt it. Because the focus tends to be on those specific events rather than the common thread that runs through them — risk.
When things are going great, the concept of risk doesn’t seem important. Equities keep moving higher and volatility is essentially non-existent. Complacency is everywhere. What could go wrong? Buy every dip. So far, that strategy has worked pretty well. As such, you’ve got to follow that strategy! If equities do indeed correct, take advantage of the correction and buy the dip. You’ll be able to do that if you’ve incorporated the idea of risk into you investing/trading activity.
We cannot control how much money we make. We buy stocks, but we do not really know how high they will go, or whether they’ll move higher at all. But we can control how much we lose. And we exert that control by defining the risk that we are taking. And when you find yourself thinking, “Oh, that’ll never happen”, you know that you are not accounting for risk. Don’t ever say that, and always account for risk. You’ll make more money by losing less money. It’s really just math.
See you in the forum.
–Dan
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