My father has experienced two heart attacks already.
On top of that, he’s had surgery to remove a finger in his right leg, he’s been 10ft below the surface in pressure cells to get rid of bacteria in his body, and has been battling diabetes since the age of 35.
He is now 64 years old. He can’t work and barely walks. He is depressed, and his language is that of a man, who summarizes his life as if all the good things are behind him.
His partners, friends, family, and practically everyone who’s communicated with him love him. He is very nice, charming, hilarious, and an old-school salesman.
When I was younger, I thought my father was the man to be. He seemed invincible.
But, inside his body, where no one sees what’s happening, his faulty eating habits, his mediocre sleeping routine, and his elevsted stress levels were building up a massive counterproductive reaction.
For nearly 55 years, he lived the good life, eating anything, though the doctors instructed him to watch his blood pressure. He slept at odd hours, though we know the body relies on sleep, as the No.1 attributor to sound health.
One day, though, it all came crashing down.
Similarly to my father’s 55-year run, the U.S. stock market looks incredible on paper. Years of rising corporate earnings, coupled with share buybacks, steady dividend issuances, and lower taxes have all fueled a bull market, which allowed many businesses to triple and quadruple in price.
The problem, though, is that many of these businesses have been managing risk the wrong way.
Because central banks have been monetizing for so long, injecting liquidity and keeping rates at artificially low levels, it’s hard to understand which companies are prepared for higher oil prices or normalized interest rates.
In fact, it’s difficult to assess what businesses are prepared for inflation or the change in consumer habits, from baby boomers to millennials.
Just like clogged veins, which manifest in heart attacks, many investors do not take into consideration the immense risks of deficit spending, rising entitlement payouts, the noticeable wealth gap between the rich and poor, or geopolitical challenges.
In fact, the only thing troubling investors, it seems, is that regulators could come down hard on tech companies, like Facebook, with new privacy laws, which will impact their bottom-lines. But the fact that the U.S. and Russia are playing with a Middle-Eastern front is not prompting any risk-off trades.
Like my father, who kept eating sweets, even after doctors warned him about the cause and effect relationship of this malpractice with his body, investors are ignoring risks today.
Learn to identify, manage, and control risk right now and at all times.
One of the key relationships to understand is that long-term investors UNDERPERFORM in market bubbles, since they tend to opt-out and stay in cash.
For example, during Q4 of 2017, we put a strict HOLD on Bitcoin OVER $8,000, so we missed out on its 150% move all the way to $20,000.
On the flip side, we weren’t concerned with its drop to $5,900 as much as the thousands of people, who bought above $10,000, were.
During the Dot.Com bubble, Warren Buffett underperformed many investors, but many of these “investors” are not around anymore, yet he remains the richest investor ever, by a wide margin.
Remember, a risk is only discovered after-the-fact. When every stock is going higher, risk is buried under the guise of mania, but just like a heart attack reveals years of inadequate nutrition, so the next bear market will reveal which investors are leveraged and too concentrated in one asset class.
Spread your bets.
Hold plenty of cash.
Do not chase the market higher in fear that others will become richer than you. The rules of the game are the same as always.