The following was first posted on Medium.com
I will admit, as an economy bear, I made money during the latest stock market crash. Not a lot, but enough for my gains to cover my losses.
Knowing the Coronavirus was about to cripple the global financial system, I moved my money into safe assets by the end of January. I bought treasuries, gold, and U.S dollars while selling restaurants, travel companies, and oil as protection, netting a 12% return on investment. Not bad when the market was in complete chaos: a fire sale where everything sold off.
But I’m not here to boast or to brag. Instead, I’m here to show you the steps I took to make that vital move. To do this, I had to overcome the major conflict of interests, avoid the cardinal sins of trading, and drastically change the way I thought about investing.
Once I made the necessary adjustments, though, my newfound mindset helped me to both preserve and increase my net worth, setting myself on the path towards wealth preservation and away from wealth destruction, regardless of whether the stock market was going up or going down.
Don’t Limit Yourself to the Stock Market
A big mistake I made when starting out was limiting my asset allocation to stocks and ignoring the other major asset classes: currencies, commodities, and bonds. By assigning a certain percentage to each one, I added real diversification to my portfolio while reducing my exposure to the stock market.
Doing so will broaden your financial knowledge. Learning how bond markets, currency markets, and commodity markets work, what drives them, and how they’re interlinked, enables you to make better investment decisions. And even though there’s an endless learning curve involved, that’s a good thing: market dynamics can change in an instant, so you’ll need to stay on top of things.
Listen to the Bulls and the Bears
To be a successful investor, one of the greatest strengths is the willingness to hear both sides of an argument before making an investment decision.
Whether you’re buying stocks or buying real estate, find the biggest bull, the biggest bear, and someone in the middle, then, try to understand each of their perspectives. By knowing what can go right and what can go wrong, you’ll have better conviction when taking profits and cutting losses.
Learn to Love Managing Your Money
The most popular investment strategy today is passive investing: where you’re “naked long” stocks via an ETF, a mutual fund, an index fund, or a pension fund, expecting your wealth to increase over time. But, as the latest stock market crash demonstrates, this strategy will lose you a lot of money especially if you’re just getting into the investing game or you’ve made contributions all the way to the top.
The problem with passive investing is the inherent conflict of interest between your goals and the goals of the firm offering financial products. Remember, they don’t make money when the value of your assets goes up or down, they only make money from commissions, so they will entice you into buying speculative assets at any price. Quite simply, they don’t care if you lose money.
The solution? Manage your own money. Though it’s hard to find someone to learn from who is both a legitimate and successful investor, there are a few ways to increase your chances.
Learn From Investors Who Want You to Succeed
The latest stock market crash has proven one thing: listening to financial media will lose you money as they report news that’s already priced in, and their guests are usually from financial companies who are trying to sell you information that isn’t necessarily designed for your benefit. Remember they don’t care about your money, they care about the fees you pay them to “look after” your money.
Instead, the best way to learn is to find a highly successful investor with a proven track record and read their books. Recently I read the following: The Misbehavior of Markets by Benoit Mandelbrot which taught me how to manage risk effectively and, more importantly, what can go wrong, the New Case for Gold by Jim Rickards which taught me the importance of holding gold in a portfolio, and Hot Commodities by Jim Rogers which taught me how to both invest and trade commodities profitably. Because these authors have decades of experience with a proven track record, I know I’m not getting screwed.
Whatever takes your fancy, there’s an endless supply of books written by successful investors out there to learn from. Now all you have to do is avoid letting this amazing library of knowledge and information go to waste.
Prepare to “Go Short” (There are Ethical Ways)
In every investor’s career, there will be a time where you’ll want to go short. But it’s also taboo: if you’re betting against a company, you’re betting against people’s jobs, therefore, people’s finances. However, there are various financial instruments that allow you to speculate on companies without affecting their stock prices.
One way is CFDs: Derivatives that mirror the underlying price and while the stock’s real value is unaffected — though many countries have banned them due to regulation. Another way is through the options: As they are a completely different market, they don’t affect the stock price. You simply place a bet that a company’s share price will fall but, this time, free of guilt.
But, if you really don’t want to go short, you can always move into safe-haven assets like treasuries and U.S dollars — also guilt-free and patriotic in a sense.
Never Let Your Mind Play Tricks On You
Psychology plays a big part in whether you’re a success or a failure in investing, but, in particular, the fallacies you have yet to learn and unlearn.
Recency bias: when someone believes recent events must continue in the future — also known as the hot hand fallacy — is the most detrimental fallacy by far. If you’ve never experienced a bear market before, a statement like, “Stocks have risen for the past 10 years, so they’ll continue climbing,” seems logical, but to someone who’s lived through both the Dotcom bust and the Subprime crisis eras, not so much.
If you bought stocks at the market top, I’m sorry to hear that. Maybe it was bad timing or maybe it was FOMO: the fear of missing out. Your friends, family, coworkers were bragging about making 10 to 20 percent in a couple of months, so you had to get in on the action. Us humans hate missing out on gains. In investing, however, you also have to embrace JOMO: the joy of missing out, to save yourself from joining in speculative bubbles at their peak.
Understand the Products You’re Investing In
In the latest crash, ETFs (Exchange Traded Funds) were the new subprime. There were warnings from many experts as to why they were dangerous and even a quick Google search revealed the risks.
“Highly liquid instruments” became illiquid during the crash, causing heavy losses all over the ETF universe, including those backed by long-term US treasuries which the market deemed to be pristine.
When deciding whether to invest in any financial product, do an hour of research into how they work, and most importantly, what can — and will at some stage — go wrong.
Stop Outsourcing Your Financial Education
Ultimately, the stock market crash will change the way many investors think about stocks and whether they’re a good investment going forward.
In any market, you have winners and you have losers, but you would expect the smartest people in the finance industry to successfully predict the stock market crash and come out unscathed. In 2020, however, Bridgewaters Associates, Ray Dalio’s hedge fund, is down 20%, and if you’ve ever read his popular self-help book, Principles, you’ll know that he’s a very smart guy. But the crash proved that, sometimes, even the smart guy gets it wrong.
Though it’s hard to make money in investing over your lifetime, you’ll stand a better chance navigating the markets yourself instead of outsourcing your financial success to third parties. The best decision I ever made was to get interested in economics, money management, and markets. It’s a wild ride, but you won’t regret it.
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine, Markets Media Group or its staff. Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community.