Leverage the Process

One day history will be written surrounding the pandemic and the financial markets, for now, the story is still unfolding. A recent Wall Street Journal article reminded me that not all is rosy despite the all-time highs in the markets today. Many of those affected by the pandemic have given up getting rich in the markets and have returned to their careers, some with less money than they started with. After all, if making huge sums of money in the markets was easy, we would all be rich.

There are euphoric periods in markets where sharp gains can be made, however, such periods reinforce the false benefit of excessive risk taking, which eventually catches up to most of us. Archegos Capital Management, a successful family office, recently took excessive risk wiping out the entirety of its more than $20 billion in capital in a few days. It now appears the firm’s prime brokers essentially allowed the firm to leverage up their portfolio via swaps by as much $80 billion dollars or 4 to 1. The brokers were unaware of totality of the exposures and in the end also lost billions when the margin call came due.

The most successful investors in history have been excellent risk managers; they keep their losses small and ride the most profitable trends. They have a process to identify what to buy, when to buy it, how much to buy, and when to sell. Most people love to buy and accumulate stocks over time but never develop a process for when it is time to sell and move on. Compounding the challenge of making money in the stock market is the fact that most stocks will lose money. Owning the leading stocks in the market will make the difference between making and losing money in one’s portfolio. In a study of 61,000 global stocks from 1990 to 2018, 811 companies, or just 1.33% of the total, accounted for the entirety of the market’s return. Sixty percent of stocks did worse than short term treasury bills over the same period. Unlike the hit show Billions, successful investing is not terribly exciting. It is about implementing a time-tested process for keeping losses small and holding winners until the tide turns. Focus on process and the returns will take care of themselves.