This blog post originally appeared on RealMoney Silver on Sept. 21 at 8:03 a.m. EDT.
Being convicted in a view or in a series of views is important and a key to superior investment performance, but controlling risk at times of strategic misdirection can be equally important. Almost as critical a determinant of portfolio management as making money when your expectations are accurate and your portfolio is properly structured is dealing with how you handle yourself as an investment manager when you are wrong.
While you wouldn't necessarily know it by watching the business media, in which it appears that nearly every talking head missed the 2008 stock equity market collapse and bought the March 2009 generational bottom, over the course of one's investing/trading career, we all get out of sorts. And in a market that for 2008 and 2009 seems to have been a one-way street (down in 2008 and up over the last six months), money management and discipline is critical to surviving the extreme moves in momentum.
Here are six of my strategies to avoid large losses when your tactical view is wrong:
- Always stay on top of individual stock fundamentals by talking to management, the competition and company analysts and industry specialists.
- Use out-of-the-money puts/calls as protection, especially with high-beta stocks.
- Do not press losing positions.
- Accelerate the review of every portfolio holding by rechecking the fundamentals at a 5% to 7% loss, and, regardless of those fundamentals, automatically reduce positions as they approach a 10% loss.
- Maintain a diversified portfolio. (I limit my shorts to 2% positions and my longs to 3% positions.)
- Never employ leverage.