“Not losing money,” notes Wall Street Daily Senior Analyst Jonathan Rodriguez in this weekend’s Saturday Spotlight, “is just as important as growing your money.”
Like a lot of folks who make their living analyzing financial markets, Jonathan gets a lot of questions from his friends – questions like “Where are stocks headed next?”, “Who’s going to be the next Apple?”, and “Is the dollar really headed for zero?”.
“Rarely – if ever – do people ask, ‘What’s the best way not to lose money in the stock market?’”
Successful trading is about mastering two critical disciplines.
You have to be able to get the direction of the market move right. And you have to manage the risks associated with particular positions you hold.
Senior Analyst Jonathan Rodriguez uses his time in the Saturday Spotlight to explain three critical ways we can limit downside risk when it comes to trading stocks.
Know the Unknown
“Volatility” and “risk” generally occupy the same space in investors’ heads.
We’re accustomed to using the Chicago Board Options Exchange Volatility Index (VIX) as a measure of risk.
Indeed, when stocks go up, the VIX goes down. And when stocks go down, the VIX goes up.
Thus we know it as the “fear gauge.”
There are some subtle distinctions about volatility, risk, and uncertainty we need to appreciate if we’re to successfully invest and build real wealth over the long term, particularly if we’re going to trade.
“Risk” is generally defined in terms of unknown outcomes whose odds of happening can be measured or at least learned about.
Think of a simple coin flip experiment: We know that, if the coin is fair, it will land on either heads or tails.
The key is we know exactly the odds of each of the possible events: 50% heads, 50% tails. And we know it before we begin the experiment.
The essence of risk is that we can describe the odds of the unknown – there are indeed a known number of outcomes with just two sides to a coin, and the probabilities can be mathematically calculated.
So it is with poker, where even with 52 cards there are a known number of outcomes and the probabilities can be mathematically calculated.
Imagine a second coin flip experiment – except this time we introduce an “unfair” coin. And we replace the coin with a new, unfair coin after each flip. We know the coin is no longer fair.
Under these circumstances, we know that the unfair coin will land on either heads or tails. But we can’t say before we start the experiment how many times it will land on heads or tails.
This is “uncertainty”: You can’t assign probabilities to the possible outcomes.
And under less-controlled circumstances, you don’t know all the possible outcomes. These are events that we don’t even know how to describe.
This is more like the stock market, where there is an infinite set of outcomes. Anything can happen in financial markets.
Long-term success when it comes to investing requires that we assess the likelihood of random events – positive and negative. We certainly want to let the upside roll as long as possible – let our winners run, as it were.
But we have to prepare for the “Black Swans” that wipe out wealth. That means understanding the tools we can use to protect against sudden, unexpected, and steep downturns.
Perhaps the most important one is diversification – across asset classes, sectors, and industries.
Another positive step we can take is to limit fees and expenses related to managing our portfolios.
Those are bigger-picture, from-30,000-feet observations.
What happens in the heat of day-to-day market moves?
Calmer Than You Are
In addition to providing critical technical insights, Jonathan exercises the discipline he talks about in today’s video as the lead strategist for Trigger Point Pro.
Trigger Point Pro is a trading service focused on the use of the “golden ratio” to identify profitable trends and trading opportunities.
Of the 10 current open stock positions Jonathan has recommended for Trigger Point Pros using his proprietary trading system, nine of them are in the green.
That’s good for an average return of 13.1%.
To be sure, Jonathan practices what he preaches in today’s Saturday Spotlight. Here are three key tools he employs to guide Trigger Point Pros.
Position size is the first major consideration. “Generally speaking, the average investor really shouldn’t be looking to invest more than 5% of their capital in one play.” Anywhere from 1% to 3% is “pretty good.”
The question you need to ask yourself is, “If the value of this stock goes to zero, how much is this going to affect me in the long run?”
A second important consideration – particularly for the non-professional – is the use of trailing stop-loss orders.
“It’s an automatic fail-safe” that allows you to focus on your day job, your golf game, or your garden with some “peace of mind.”
Jonathan’s third piece of advice today is probably the most important – and it’s probably the most difficult one for us to master.
“Exercise patience.” The last thing we want to do is “chase stock prices.”
As important as it is to protect our downside, if we pay too much, we’re limiting our upside from the get-go.
He’s probably the most famous and arguably the most successful individual investor of all time.
But Global Markets Analyst Martin Hutchinson has a compellingly contrarian take on the “Oracle of Omaha.”
“Warren Buffett, often held up as a shining example of the benign side of capitalism,” Martin writes, “has been known to lecture investors and corporations alike on good behavior.
“But it doesn’t seem as though he’s following his own advice. His company, Berkshire Hathaway Inc. (BRK-A), hasn’t paid a dividend since 1967.”
And dividends are “useful for keeping management in check.” Buffett claims he knows better what to do with that cash than shareholders, but Berkshire posted a loss of 12.5% in 2015 versus a gain of 1.2% for the S&P 500 Index.
“With $24 billion in net income and $31 billion in operating cash flow in 2015, Berkshire Hathaway could well afford to pay a dividend,” Martin concludes.
A dividend would also force some discipline on Buffett and his eventual successors.
Martin also chimes in on a critical issue that doesn’t seem to be getting the attention it deserves – neither from politicians nor voters: America’s looming retirement crisis.
This crisis is exacerbated by eight years (and counting) of imprudently low interest rates, which have hurt savers.
Chief Income Analyst Alan Gula weighs in on “the momentum anomaly and the problem it poses for the efficient market hypothesis.”
His rather startling conclusion: “Simply buying past winners and selling past losers has been a very profitable approach.”
Alan does raise an important question based on the rise of “smart beta” funds designed to capitalize on “investors’ thirst for momentum”: Is this niche becoming too popular?
Chief Technology Analyst Louis Basenese is on Twitter Inc.’s (TWTR) case again. And for more good reason.
The social media darling – whose stock is down 60% since its initial public offering – is trying to counter stagnant user growth with a desperate move born of cronyism.
Its deal with the NFL has generated headlines, sure. But it’s also likely to fail in its stated purpose, which is to win back logged-off users.
Finally, Senior Analyst Greg Miller previews “a ramped-up, turbo-charged version of the web that will dramatically change our lives.”
That’s courtesy of Verizon Communications Inc. (VZ) and its recently published perspective on the Internet of Things (IoT).
Verizon is looking to leverage its data pipeline assets and its existing content assets, including its projects for the utility and transportation industries, into “massive growth.”
“Verizon,” Greg writes, “estimates that the IoT market will grow to 25.6 billion devices in 2019 and over 30 billion in 2020.”