This blog post originally appeared on RealMoney Silver on March 22 at 7:54 a.m. EDT.I have consistently attempted to analyze and strategize about the economy, the capital markets, leading industries and individual equities. I try to do this through logic of argument and hard-hitting and independent analysis. Often (maybe sometimes too often), my views are contrarian, as they were when I called for a generational low in March 2009 and again when I pulled in my bullish horns five to six months later, and I will sometimes stay outside of the consensus, even though I recognize that the crowd usually outsmarts the remnants. One thing I am proud of is that I admit to my mistakes. Frankly, few admit being wrong; after all, it is more natural for all of us to accentuate the positives and our triumphs. No place is this more true than in the business media. If you believe the talking heads' commentary, everyone sold the 2008 high, bought the March 2009 low and have stayed fully invested since! I am fully aware that my mistakes over the past few months have been numerous and far-reaching. Above all, I have been steadfastly skeptical regarding the sustainability of the domestic economic recovery and in the view that the foundation for a sustained move in the U.S. stock market was on shakier ground than the consensus believed. I have been particularly concerned about the still hobbled American consumer, the tentative recovery in residential real estate and the weight of phantom housing inventory, the uncertain effect of the withdrawal of government stimulus, the long tail of the last credit cycle and the amount of time it will take the deep scars of the debt overload to heal, a tax-and-spend policy that is aggravating the country's already weak fiscal problems, our reliance on "the kindness of strangers" to fund domestic growth and the likely onset of numerous nontraditional headwinds (such as rising corporate, individual and capital gains tax rates as well as the financial disarray at the level of our state and local governments) that are growth- and valuation-deflating. Also, I have often noted the growing schism between the "haves" (cash-rich, highly profitable large corporations) and the "have-nots" (small businesses and consumers who face the burden of higher costs emanating from populist tax and regulatory policy), the outgrowth of which has produced an unprecedented disdain against the wealthy that has led to a series of administration-led populist and anti-capitalist initiatives. Finally, the necessary austerity measures and consequent need to increase savings and deleverage at so many levels of the private and public sectors in the U.S. and around the world potentially pose risks to even the conservative forecasters of shallow yet sustainable economic growth.
While there might not be a causality, the consensus seems to have grown emboldened (or at the least very complacent) as share prices around the world have risen parabolically over the past 12 months. By contrast, I have opined that the risk/reward of U.S. stocks has turned negative, as it is my view that some of the recent signs of economic growth in many industries represented little more than a statistical expansion from historically depressed levels. To this observer, those signposts of growth are now too readily extrapolated by the bullish cabal. They may be signaling a false sense of prosperity. All this said, I have been wrong -- at least, Mr. Market has been saying so! I may still prove to be correct in my economic and investment conclusions; as Warren Buffett has written (in paraphrasing Ben Graham), the market is a voting machine over the short run, but it is a weighing machine over the long run. Regardless of the eventual outcome, however, perhaps the single most important ingredient to being a successful money manager or individual investor is to control risk and avoid large losses when one's baseline expectations go awry. An example of when the majority of investors lost their discipline and failed to react in a timely fashion to changing financial and credit conditions that served to sink the equity markets would be 2008. Those that stood pat and didn't sell have only recently, as Jim "El Capitan" Cramer writes, " gotten even." Ideally, we want to be correct tactically and in composing our portfolios. This means being heavily invested in leading market sectors and in the leading stocks within those sectors during bull phases and being light, or even short, when headwinds arise. Being wrong tactically and not getting obliterated remain essential ingredients toward delivering superior investment returns over the course of several cycles. The discipline of recognizing the errors in the timing of one's analysis and, even more important, respecting Mr. Market's price action are integral parts of the investment equation -- whether or not the price action is later confirmed or unconfirmed by the fundamentals.
There are many ways to control risk -- buying out-of-the-money calls and/or puts is one way -- but sucking it up and stopping out losses before they get too unwieldy are the best ways and most straightforward strategies to control risk. Taking small losses is part of the game; taking large losses can take you out of the game. Doug Kass writes daily for RealMoney Silver , a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.