A Note from Eric: Today, we are introducing a slightly new style to Smart Money. As part of that upgrade, I’m thrilled to introduce Dave Gilbert as our new “host.”
To be clear, I’m not going anywhere, and you will still be hearing from me frequently. But Dave will be running the show. That means he’ll be showcasing my key observations, while also sharing the related stories and insights that highlight the megatrends we’re tracking day-to-day.
Dave has been producing investment insights for more than 20 years, through bull markets, bear markets and everything in between. We’re delighted to welcome Dave’s unique and seasoned insightfulness to the Smart Money team.
Take it away, Dave…
Thanks, Eric. What better way to start than by quoting one of the most famous investors in history?
No, not Eric Fry… although rest assured that we will quote him very shortly. In this case, it is the legendary Warren Buffett.
“Be fearful when others are greedy. Be greedy when others are fearful.”
Conventional wisdom says the market is driven by fear or greed, but it’s really fear and greed at the same time. That’s what makes a market; you need both a buyer and a seller. At times, one emotion dominates, and even a cursory glance at market history shows the pendulum swings back and forth between the two.
I don’t think I need to tell you that in the first two months of 2022, fear was clearly in the driver’s seat.
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We only need to look at stock prices and the major indices to see it, but we want to be more scientific about it, there is a way to actually measure fear levels. Its official name is the CBOE Volatility Index (VIX), as the Chicago Board Options Exchange created it. The index is based on options activity on the S&P 500, and it is calculated in real time. You usually hear it referred to as the either the “fear index” or the “VIX” because of its symbol.
Here’s the amount of fear in the market through the first two months of the year…
You can clearly see the spike where investors began to worry more about inflation and the Federal Reserve’s response.
The second surge came in February as inflation fears persisted and have now combined with Russia’s invasion of Ukraine. The market hates geopolitical uncertainty any time, but in this case, the military action sent already-high energy prices even higher, escalating inflation fears.
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Eric may not have seen Russia’s invasion of Ukraine coming, but last November, he predicted a more volatile stock market was heading our way. During the January spike, he wrote:
“Over the last few days, the stock market has become a bumpy ride once again… and the road ahead could be a rough one. In fact, that is the exact forecast I reiterated in the January issue of Fry’s Investment Report.
“I stated clearly that I expected this year’s investment conditions to be much more challenging than in recent years. ‘Caution will outperform risk-taking,’ is the phrase I used.”
How do you balance caution and risk-taking? You don’t want to get overly cautious — aka “panicky” — and dump good stocks at low prices. And, you also don’t want to take on too much risk at a time when it can do more damage.
Here’s some advice from Eric:
“We should not take risk lightly, but neither should we let it chase us out of the market completely. Instead, I recommend pursuing a disciplined, long-term strategy that is panic-resistant.
“The best defense is a solid offense, which means focusing on the best risks, while saying ‘no’ to all the others. It does not mean that we will never suffer losses, nor that every recommended trade will outperform the market over every timeframe.”
There is no “one-size-fits-all” approach to managing risk. Every investor has a different tolerance. Some of us have a hard time with even relatively small losses. We’re just wired to pay more attention to potential dangers than potential benefits. Others may need their money to live on or within a few short years, so big downdrafts are costlier and harder to recover from.
It all needs to be considered. Here’s what Eric recommends to help you sleep a little better during volatile markets:
“We should take a few minutes to reexamine each of our investments to be sure that we are still enthusiastic about each of their prospects going forward. At the same time, we should make sure that our total allocation to stocks aligns with our actual risk tolerance and investment objectives.
“Run a simple test that goes like this: If a market selloff caused my stock holdings to fall 20%, would I be okay with it? What if my stocks fell 40%, would I be okay with that?
“Another way to ask that same question would be: What would bother me more; missing out on a 30% gain… or suffering a 30% drawdown. Only you know the answers to these questions.
“No matter what cautious steps you might take, some level of regret is almost inevitable.
“If you trim positions and the market soars over the next 12 months, you might regret that you sold anything. On the other hand, even if you sold half of your holdings before a major selloff, you would probably regret not selling even more.
“There is no perfect, all-weather approach to managing risk. Long-term investing is both a science and an art. So that’s why I recommend taking profits along the way, while still continuing to invest in the most promising investments you can find… no matter what the market environment might be.”
As Eric says, “The road to significant gains always encounters jarring potholes along the way.” We may curse them as they temporarily knock our portfolios out of alignment, but we can still arrive successfully at our destination with a trunk full of investment gains.
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Having said that, over the last few weeks, we’ve published a LOT of risk-centric pieces in Smart Money. Here’s a short catalog of those pieces…
- Intelligent Asset Allocation: Equip Your Portfolio to Survive and Thrive
- The American billionaire J. Paul Getty once remarked that his formula for success was to “rise early, work hard, strike oil.” But if you don’t strike oil, you need other ways to accumulate — and protect — your wealth.
- Rightsizing Your Risk and Overcoming the Wealth Gap
- A crisis often arrives like a thief in the night. Most of us never see it coming until it has already launched its initial attack on our portfolios. When stock prices are flying high, we tend to believe they’ll fly even higher. We underestimate the risk of a severe sell-off. But fortunately, there is a better way to navigate crises.
- The Truth Behind Warren Buffett’s Success
- One of the most valuable lessons in investing was taught to Eric by his father back when he was a naïve, overly confident 25-year-old (his words, not mine). The lesson was simple: Always keep some cash on hand. Yet most investors fail to appreciate the value of cash. They think of it as “dead money” that yields nothing. “Cash is trash” is a phrase that often circulates when stocks are soaring. But cash isn’t always trash.
- There’s No Crying in Baseball… Or In the Stock Market
- During tough periods in the market, it’s easy to want to give up. But those times are ideal for reassessing, reallocating and reinvigorating your portfolio with strong stocks that are trading at a discount. And Eric doesn’t just mean any stocks — but something called “forever stocks.”
- An Oldie, But A Goodie
- There’s a philosophy that just about everyone knows in the investing world: Buy low, sell high. This strategy has succeeded brilliantly for decades, if not centuries. But it sounds so simplistic that it feels almost moronic… Yet few investors manage to achieve this objective consistently. Why is that? The answer relates to two key traits every investor needs: discipline and patience.
- “Sparking Joy” Begins with Torching Losers
- Even some of the most seasoned and savvy investors fail to tidy up their portfolios as they should. And the first step to doing so is to go through each of your investments and ask yourself if this item — to quip “decluttering” guru Marie Kondo — does this investment spark joy?
Regards,
Editor, Smart Money
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On the date of publication, Dave Gilbert did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.
