Spotting Horizon Risk

by M.J. Milner

Most people have a number of mechanisms to avoid being constantly distracted by risks that probably don’t apply to their daily lives. The ritual of work importantly focuses upon an alarming array of blinders that create structures producing methods of certainty. After any reasonable amount of time a level of numbing mastery emerges with enough financial extraction to justify its continued maintenance. Some people call this tunnel vision. The same “buy and hold” mechanism that works so well in lifetime real estate investing prevents portfolio adjustments at market tops that can greatly enhance market returns over time.

 There are a number of factors emerging on the macro level right now that need to be pointed out as possible threats to a large number of people. My clients with retainers have already responded to these stressors and are adjusting various short term components of their holdings. In general equity markets are at or near record highs. Any stocks that are long term hold should be left alone. Positions that have NOT responded to catalyst events should be neutralized and reliquified. Obviously if they haven’t responded to a catalyst and a market high there is something wrong with them and reasonable loss can be taken if necessary. Short term long positions should be examined and tactically exited, with a view toward increasing available liquid cash. If you do not hold cash, or raise cash periodically you are a “buy and hold” investor. That strategy is fine if your assets exceed $500,000. If not, holding and raising cash at market highs will improve our results, over time.

On a macro level there is a volatile election process that may derail the economy,on a whim AT ANY MOMENT. The threat of a real recession fomented by international fluctuations, increases as we move towards the end of this year. Because we started the year down very sharply and had a very strong run, professional money managers may exit and lock in their annual results prior to the election. For the same reason year end tax selling may occur much earlier to avoid the uncertainty of the election. Most credible investment houses are picking a year end S&P number that is currently within 300 points of the current level. This may mean the market goes down or sideways for quite a long period of time. If that happens-raising cash in a falling market is a game for losers. Buy low and sell high means just that. No one wants to sell when the sky is the limit or buy when the market is going to zero. The game is one of courage and discipline. Skip the top 10% and the bottom 15% the guts of the profit lies in the middle 80%.

If a recession does appear as a growing certainty the possibility of layoffs and local financial disruptions not only grow, but increase exponentially as retail and fast casual dining margins and payrolls have become issues of GREAT concerns. In the “new normal” a recession may create a severe and precipitous decline in the economy. One should be prepared to protect one’s primary lifestyle and take advantage of short term opportunities.

As I state clearly in my book, Risk Literacy,- buy low and sell high only works if you execute on the sell high part. My tactical advice is to acknowledge the risk on the macro level and raise cash, conserve capital, cut back on any new long ideas, and start a shopping list for opportunities. If you play the downside prepare a shopping list of markets and stocks you wish to short.   If the economy does a short term nose dive there may be many brief opportunities to acquire equity of solid value at much lower prices. You can only do this if you hold adequate cash and are very secure with the long term positions you currently hold. You should be selling at market tops and buying at market corrections that revert to the mean averages, or to established moving average floors.

Risk Literacy by M.J. Milner

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