May Is Over... Hallelujah! - 05/28/10

Lessons from Leonard

 

"There was a time you let me know
What's really going on below
But now you never show it to me, do you?
And remember when I moved in you
The holy dove was moving too
And every breath we drew was Hallelujah."
-- Leonard Cohen, Hallelujah

There are numerous lessons to learn in the aftermath of the investment carnage that occurred during the month of May. Here are a few:

 

  • As an investor, you are usually well served -- over the intermediate term -- to err on the side of conservatism.

     

  • Unpredictable developments and Black Swan events are occurring with greater frequency.

     

  • At times of uncertainty, return of capital is more important than return on capital.

     

  • Discipline (and risk control) trumps investment conviction.

     

  • Let your profits run, but contain your investment losses through rigorous risk management.

     

  • Never chase market strength. This is particularly true in an uncertain world with meaningful headwinds, as price momentum is often a particularly fickle mistress.

     

  • Invest with your head, not over it. Under any condition, avoid using leverage in your portfolio.

     

  • Even when markets are rising, always keep your exposure to equities at levels that make you feel comfortable and at levels that don't upset your life (or sleep!).

     

  • Stay diversified -- across industry lines, individual securities and asset classes.

     

  • Remember that stocks often behave differently to their underlying fundamentals.

     

  • Never listen to Perma Bulls (especially during the month of May!) or Perma Bears -- they are attention getters, not money makers.

     

  • There are always new influences to an asset class -- that influence is often disruptive. In the case of equities, the increased role of quant/high-frequency trading has made the investment landscape more volatile and less predictable.

     

  • Reflect on your investment mistakes so you don't repeat them