The Key To Winning Any “Race” Is Knowing The Finish Line
By Ronnie Thompson
Several years ago I sat in a conference room at a mutual fund company down south with a partner of mine and 40-50 others top level advisors. The main keynote speaker for this entire conference was a Pulitzer Prize winning Laureate of Economics by the name of Eugene Fama.
Mr. Fama spoke to us about his history and the countless hours of research he did over decades on the stock market. At the end of his presentation, he opened the floor for questions from the audience. To my shock it became a “chest puffing” match in the form of questions challenging the ideas of one of the brightest minds in our industry. Mr. Fama never changed his tone, never became frustrated and answered every question calmly and attentively. I knew in that moment “wisdom” is silent. It does not raise its voice or get loud. It accepts challenges because in the end it knows and is certain. It was in that moment a young kid in the front with an old dusty suit stands up and asks Mr. Fama, “if you were on our side of the business and knew what you know about the markets what would you say is the most important part of our job for our clients?” Mr. Fama looked up with a big smile on his face and said “RISK!!!!” “It is your job as advisors to help each of your clients clearly identify their taste and tolerances for RISK in their investments.”
This got me to thinking. Deeply. When it comes to investing what is “RISK?” RISK can be defined by the opportunity to gain significant money at the RISK of losing significant money. For most people RISK is defined by feelings. “I lost a lot of money in 2008 so I don’t like RISK!” or “My parents lost everything during the last recession when I was a kid, so I hoard my money!” Those things are relevant but can get you in trouble if that is all you are basing your decision on. The real question that should define RISK is “what are you trying to accomplish, specifically?” “Making money” is not an objective, it is but how do you quantify that? If you make a nickel a day you are “making money,” but is that your objective? Making 8,000 a month or 30,000 a year that makes the objective more quantifiable and more achievable. When it comes to RISK, I find many don’t factor in their goals and objectives.
I will give you an example: let’s say you have 300,000 when you retire. You sit down to come up with a plan and realize you need 45,000 a year for the next 10 years. I ask you what your tolerance is to RISK, and you say, “I hate RISK!” Well one of two things are going to have to happen, either you are going to have to take far less than 45,000 a year OR you are going to have to add stock RISK to the investment to get the earnings you need to create that payout. The point in all of this is RISK should be in line with your goals and objectives.
With all the huge opportunities many specific individual stocks have given us these past 10 years it has never been more important to understand RISK clearly. From AMAZON, NETFLIX, GOOGLE/ALPHABET, and TESLA to crypto currencies and many more the stock market has become a proverbial main floor of a casino on a Saturday night, and no one can lose. It was the godfather of physics Sir Isaac Newton that once said, ”What goes up must come down.” As a write this I am not suggesting a looming correction or recession, what I am saying is the markets are cyclical (they go up and down) we just don’t know when they will go up or go down. Therefore, it is so important to have a clear understanding of RISK for you and your goal.
In conclusion, now is the time to analyze RISK within your investments. Do it regularly. Especially when it comes to individual company stocks. If your goal is making 10 million dollars or “having 100,000 a year in income you cannot outlive.” Does it make sense to do so in 3-4 super-hot stocks? Or does it make sense to preserve some of those large earnings many have experienced and do so in a more calculated way based on RISK/OBJECTIVE. The problem when you do not understand and analyze RISK regularly and when your objective is “making a ton of money” it can lead you into the trap of the downside to the RISK that got you the reward in the first place.
Ronnie Thompson and Steve Wilbourn are investment advisory representatives of and provides advisory services through CoreCap Advisors, LLC. True North Advisors and CoreCap Advisors are separate and unaffiliated entities. Securities trades are not accepted through email, voicemail or fax. Please contact your representative at the number listed above to place any securities trades. This e-mail message and any attachments are solely for the confidential use of the intended recipient. If you are not the intended recipient, notify us immediately by return e-mail and promptly delete this message and any attachments from your computer. These independent views and opinions expressed are those of Ronnie Thompson and Steve Wilbourn and are not necessarily the opinions of CoreCap Advisors. Investing involves risk and investors may incur a profit or a loss. Any information should not be deemed a recommendation to buy, hold or sell any security. You should consult with a licensed professional for advice concerning your specific situation. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
