Investing is a balancing act between the fear of missing out and fear of losing. Bull market optimism often makes it easy to forget losing is possible. It’s infectious. And the side effects can be costly.
Because greed, envy, and over-optimism around bull markets can lead to excesses in a portfolio. The stock portion grows in size, as markets rise, in relation to the rest of the portfolio. This can add to your returns in the short term. It may even tempt you to move money out of whatever is underperforming to put it into stocks. But both cases adds risk that can blow up when you least expect it.
This brings us back to the balancing act. It’s a trade-off. Gains against losses. Reward against risk. You don’t get one without the other. In fact, an excess of one means the other isn’t far behind.
So protection from losses is a critical piece of a portfolio. It needs to be weighed at all times. Especially in bull markets, when profits are easy to come by and losing seems impossible.
Because the long history of markets suggests that the current bull market is far more likely to end, like all the rest, than go on indefinitely. It’s best to prepare for that eventuality the further it drags on. Not doing so can be disastrous.
Finding the perfect balance is never easy but it means weighing the odds, diversifying, keeping the downside in mind, and not letting over-optimism infect your investment decisions.
Of course, it helps to keep some of the advice below in mind:
One of the oldest sayings on Wall Street is “Let your winners run, and cut your losers.” It’s easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds. — Peter Lynch
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History shows us, over and over, that bull markets can go well beyond rational valuation levels as long as the outlook for future earnings is positive. — Peter Bernstein
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Bull markets and bear markets last long enough so that the average trader is likely to forget by the time the climax is approaching that any sort of movement is possible. — Philip Carret
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Buying stocks of prosperous concerns may be good business — but only at a certain price. But if you will make sure you know what you are getting for your money, you will be doing what nobody does in a bull market. — Edwin Lefevre
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If the market’s going wild and you want to be in it, you either have to lower your standards to stay in the game or you buy stuff which may not participate because it’s not part of the game at that time. — Walter Schloss
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When the markets are fairly ebullient, investors tend to hold the least objectionable securities rather than the truly significant bargains. — Seth Klarman
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My experience teaches me that by far the largest losses have been sustained by investors through buying securities of inferior quality under favorable general conditions. — Benjamin Graham
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Even a great company can be priced too high if there’s a lot of glamour attached to it. — Philip Fisher
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The enchantment which some growth companies convey to the stock market lends a premium to their common stocks which is not always justified by the statistical background. — Peter Bernstein
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It is a great mistake to refine the analysis of a single year’s showing to the last possible penny, in order to build from that some substantial idea of the value of the stock; because it cannot be found in the results for any given year no matter how accurately those results were stated. — Benjamin Graham
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Buy only what you understand, believe in, and intend to stick with — even when others are chasing the next miracle. — Peter Lynch
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People who chase growth, who chase highfliers, inevitably lose because they paid a premium price. They lose to the people who have more patience and more discipline. — Seth Klarman
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A large advance in the stock market is basically a sign for caution and not a reason for confidence. — Benjamin Graham
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The mistake most people make is answering the door just because Mr. Market knocks. You don’t have to let him in. — Charles Ellis
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The chief hazard of a careful common stock program is not that it may bring unexpected losses, but that its profits will turn the investor into a speculator greedy for quicker and bigger gains — and therefore headed for ultimate disaster. — Benjamin Graham
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If the stock market has a period of outperformance of its long-term return, it is inevitably followed by some period of underperformance. But people being optimistic and greedy by nature take the recent short-term outperformance of stocks as a sign of good things to come, rather than a warning of bad things to come. — Seth Klarman
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It makes no sense for individual investors to jump in and out of the market. People who trade in that way rarely die rich, whereas the patient investor often does. — Philip Carret
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It is just appalling the nerve strain people put themselves under trying to buy something today and sell it tomorrow. It’s a small-win proposition. If you are a truly long-range investor, of which I am practically a vanishing breed, the profits are so tremendously greater. — Philip Fisher
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While majority opinion can give any market movement considerable momentum that keeps it going in the same direction, majority opinion is inevitably and consistently wrong at turning points. — Peter Bernstein
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Whenever you get a wild excess on the upside, the following correction doesn’t just go back to normal; it almost always falls way below normal. — John Templeton
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You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready. You won’t do well in the markets. If you go to Minnesota in January, you should know it’s gonna be cold. You don’t panic when the thermometer falls below zero. — Peter Lynch
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Whenever we consider an investment, we think just as much or more about what can go wrong as about what can go right, and we put the avoidance of losses on a high pedestal. — Howard Marks
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You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse. — Seth Klarman
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Diversification is a safety factor that is essential because we should be humble enough to admit we can be wrong. — John Templeton
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I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. — Peter Bernstein
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Participation in the stock market is not limited to the experienced, the conservative, nor even the intelligent. It is a game at which any number of people may play. And as the market level rises, the quantity of players grows rapidly and their quality diminishes somewhat in proportion. — Benjamin Graham
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The biggest risk is not knowing what you are doing. — Peter Bernstein
Last Call
- Howard Marks & Joel Greenblatt: Is It Different This Time? – RealVision
- The Big Long – Reformed Broker
- Emerging Markets: Slow Growth, High Volatility – Verdad
- Best Story Wins – M. Housel
- Why Investing is So Much Fun – Klement on Investing
- Wall Street Short Sellers: Hated For Centuries – NPR
- Your Big Break – S. Godin
- Why Behavioral Economics is Itself Biased – Evonomics
- Why Do We Even Have Dogs? – Slate
