Investing Advice: Managing Risk in the Market

Posted On May 23, 2018 2:17 pm

For today’s investing advice, JC Parets of All-Star Charts provides a great discussion of How to Manage Risk.

Everyone always wants to talk about how high the stock they just bought is going, or how much money they’re going to make on a new position. “JC, I think Apple goes to a Trillion Dollar Market Cap!” or “JC Bitcoin is going to $100,000!”. These are things I hear frequently, or at least some sort of variation of these comments.

This is perfectly normal behavior. We should not be afraid of it. But more importantly, I think we need to be aware of the implications of these feelings. The thing is, once we are already in a position, our emotions get involved. When our stress levels rise, we act emotionally, rather than logically. This is how we’re hard-wired. It would be abnormal for us not to think this way. But again, the important thing is to be conscious of it and not let it dictate our actions.

So how do we do this? How do we behave in the exact opposite way than how nature intended? Well, once they reach the age, little boys start getting certain feeling about little girls. This is perfectly normal. But these kids are then taught to control these emotions and behave appropriately. Why should it be any different in the market?

As much reading, studying and executing that I’ve done throughout my life, the one flaw I consistently find in every investor is themselves. I am my own worst enemy. I can’t get out of my own head, and not just on the golf course, but in the market. And there is nothing wrong with that. We are hard-wired to do the exact opposite thing that we should be doing at the exact wrong time when our stress levels are high and therefore acting emotionally. That’s just evolution and cognitive behavior. The important thing is to be aware of it.

So what do we do? How can we fight nature?

For me, the only way to avoid letting our elevated stress levels negatively impact our decision making is to have a plan. The plan should consist of two outcomes: What happens if we’re right? And more importantly, what happens if we’re wrong?

I want to identify the price where I think a stock is going and I want to point out exactly the price where my thesis will be proven wrong. Marty Schwartz, one of my favorites, put it so nicely, “Know your uncle point”. Bruce Kovner also said it well, “I know where I’m getting out before I get in”. I don’t know why some investors are so arrogant to think that their opinions will always be correct. Just imagine if it’s not? What then? Remember, we’re not in the business of being right, we’re in the business of making money. There’s a difference.

 Related: Learn Why Winners Tend to Keep on Winning – And What This Means for You

Tagged with:

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

Related Articles