What If You’re Wrong?

October 30th, 2008 • Related • Filed Under




Look at every investment disaster individual investors have endured throughout history and the cause is virtually always the same. They neglected to ask a simple question: What if I’m wrong?

  • Take the guy whose retirement account is loaded up with shares of one company, the same one he works for. He exposes himself to a career downturn and an investment disaster at the same time. He forgets to ask, "What if I’m wrong?"
  • Or the woman who buys an investment property in a hot market, taking out a mortgage she can barely afford. What if she’s wrong?
  • Take the trader who loads up on call options, trades heavily on margin or bets the farm on the bull market in oil continuing. What if he’s wrong?

Of course, every investor can be wrong. We all are occasionally. Successful investing is about taking – and intelligently managing – risk.

Investment U

We Know The Future Is Unknowable At Investment U

We at Investment U are well aware that to a large extent the future is unknowable. So despite our well laid plans, we always hedge our bets.

That means buying quality, diversifying broadly and running trailing stops behind each of our individual stock positions. Anyone who has done that over the past 12 months is miles ahead of the average investor.

As the old saying goes, "The winner in a bull market is he who makes the most. The winner in a bear market is he who loses the least."

Although we’re in a bear market now, the time has already come to start looking ahead.  Investment legends like Warren Buffett and Mark Mobius know this. (They have the benefit of a well-informed investment perspective.) Your average talking head, apparently, does not.

For instance, there have been six major bear markets over the past 80 years. The average decline in the Dow Jones Industrial Average of the previous five disasters – from peak to trough – was 43%.

That’s just about the low point of the current bear market. Unless we’re about to enter a "Greater Depression," we’re a lot closer to the bottom than the top.

Scared Investors Are Missing the Easy Investment Opportunities

And there are investment opportunities galore, although most investors are too scared to move on much of anything.

  • Many of them are tucked safely away in T-bills, where they can sleep soundly at night. But is the purpose of your investment portfolio to provide for you and your family in retirement or is it to play Brahms’ Lullaby?
  • Many of these investors have deluded themselves that they will wait until the coast is clear of any investment disasters and then safely re-enter the market down the road.

In other words, having failed to see the top of the market – like 99.9% of all investors – they are now confident they can pick the bottom.

What if they’re wrong? What if the market is already discounting a severe recession? They run the risk of sitting in cash, collecting a pittance, when the market starts to rally again in earnest.

13 Companies At Bargain Basement Levels – For Starters

Meanwhile, there are plenty of companies out there trading at bargain basement levels. If you don’t have much faith in near-term earnings, try a different tack. Buy a few companies that are loaded with cash.

Which ones? Well, for starters, there is:

What if I’m wrong? What if these cash-rich companies go down in the near future, too?

That’s always a possibility.

Limit Your Downside Risk With Trailing Stops

But if you use our recommended 25% trailing stop, you’re not just buying cheap… you’re strictly limiting your downside risk. 

The investor holed up in cash, on the other hand, is earning a meager 2% or so on his money.   He may not reach his investment goals. But he sleeps well… and he feels safe.

What if he’s wrong?

Good Investing,

Alexander Green
Investment U

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