(Boris Schlossberg and Kathy Lien, two of the leading experts on foreign-currency trading and other investments, join the Money and Markets Afternoon Edition team. Once a week, we will present their financial insight after the day’s market close. Today, Boris Schlossberg writes about investing at the RIGHT price.)
The Gordon-Gekko-I-am-Master-of-the-Universe stereotype of Wall Street is actually not how true wealth is built. “Have a hunch, bet a bunch” is not the cornerstone of success of the great investors.
If you listen carefully to what Buffett says, you realize that wealth is built by giving yourself a much bigger “margin for error” than most people think is necessary. In his latest letter to the shareholders, Buffett talks about the insurance business. He states that it is not enough to just understand the risks involved in the transaction and to price that risk correctly. To be truly successful in business, you need to be able to walk away if the buyer of the policy isn’t willing to pay your price.
|The right stock – at the RIGHT price.|
This, I think, is the core secret for all trading and investing success. Simply put, Buffett’s advice boils down to just two simple ideas — know the full cost of your risk and don’t chase price. When you look at the way Buffett invests, it has very little to do with picking a great stock (although he certainly tries to do his homework) and much more to do with picking a decent stock at a good price.
As investors and traders, we all have our narratives for where the market will go. But if we are honest with ourselves, we’ll admit that no matter how much research we do, the accuracy of our forecasts is largely taken out of our hands. The world is too complex, developments happen faster or slower than we think and, of course, human beings are rarely rational and their behavior is often bewilderingly unpredictable.
Even if you are right, you can be wrong.
|“Even if you are right, you can be wrong.”|
A few months back, you may have seen a movie called “The Big Short.” Christian Bale portrays Mike Burry who, as one of the heroes of the film, walks away with billions in profits by betting on the subprime crisis. Yet what is lost on almost everyone in the audience is the fact that Burry only won his bet by literally taking his investors’ money hostage.
Although he was absolutely right in his investment thesis, the markets refused to move his way for a very long time. Meanwhile, he was forced to pay premiums to keep his bets alive, which led to near-term losses and calls by his investors to abandon the strategy. Had Burry not had the clause in his contract that allowed him to lock in his investors’ money — in short, had he not had the “margin of error” to consider the absolute worst scenario — his bets would have ended worthless and he would have been just another woudda-coudda-shoudda chump on Wall Street instead of becoming a celebrity investor.
What Buffett teaches is that we can only control two things — the amount of risk we take on and the price we are willing to pay. One is intimately tied to the other.
Buffett and I could not be more different. As a long-term investor, he trades time for money; as a short-term trader, I try to time my money and flip it over as fast as possible. But I’d like to think we both have a healthy respect for risk and, more importantly, the discipline to never chase price, which hopefully puts me on the same road to financial success, albeit via a different path.
P.S. I am sincerely sorry — but I may have been wrong about the euro.
A few weeks ago, I told everyone who’d listen the European currency was going to continue its long slide to oblivion. Now, I’m not so sure.
I just uncovered a BIG reason why it could crash and burn at virtually any moment …
And if it does, you could be looking at gains of nearly 1,000%.
I explain everything HERE. It’s the recording of a phone call I made to my business partner Kathy Lien.
— Boris Schlossberg
The average Wall Street bonus paid decreased 9% in 2015 to $146,200, as industry profits fell 10.5% in the year, according to data supplied by the Office of the New York State Comptroller. “Wall Street bonuses and profits fell in 2015, reflecting a challenging year in the financial markets,” New York State Comptroller Thomas DiNapoli said. He added that the weakness in the global economy and the volatility of markets could also lead to lower profits for this year.
The average price for a gallon of gasoline in the U.S. is increasing and is expected to keep rising through spring, the AAA motor club said. AAA said the national average retail price for a gallon of regular unleaded gasoline was $1.81 on Tuesday, six cents (3%) higher than the previous week. AAA added that the price increase over the past week was one of the highest so far this year.
Three major companies have suspended their relationships with Maria Sharapova after the tennis star failed a drug test. The companies, Nike, TAG Heuer and Porsche, made the decision after Sharapova admitted she failed the test. She said the drug meldonium, which she took for 10 years, was prescribed by a doctor and was not on the banned list until the rules changed on Jan. 1. She said she has a magnesium deficiency and a family history of diabetes. The drug has long been thought to be used by athletes, especially in Eastern Europe and Russia, to boost endurance and help recovery. In 2010, Sharapova signed a deal with Nike worth $70 million over eight years. Nike said it was suspending its relationship with Sharapova while the investigation continued.
The Money and Markets team