Editor's note: This weekend, we're sharing a timeless essay from our good friend, TradeSmith CEO and founder Dr. Richard Smith. In it, Richard talks about something he ultimately figured out about investing and shares several steps you can take to gain more control over your portfolio...
Is there such a thing as a foolproof investing system?
After nearly 20 years of research and firsthand experience, I believe that I finally have an answer...
There's a saying at the poker table: "If you don't know who the sucker is, then it's probably you."
It didn't take me long in my investing career to figure out that I was the sucker. What I found amazing is how long it took me to figure out how to not be the sucker.
I had been at least moderately successful at most things I had tried in life... except investing (and selling encyclopedias one summer). I was accustomed to winning at most things. So why was I always losing at investing?
Eventually, I figured it out: Investing is a rigged game.
Of course, the obvious riggings exist – like financial advisers charging excessive fees, brokers churning accounts to generate commissions, Bernie Madoff-style Ponzi schemes, rampant insider trading, and high-frequency spoofed trades.
But one "rig" rules them all... Financial markets are rigged against human nature. As value-investing legend Benjamin Graham famously said, "The investor's chief problem – and even his worst enemy – is likely to be himself."
Like me, Graham was speaking from firsthand experience.
There are, of course, legitimate market functions such as capital formation and allocation. But they make up maybe 10% of market activity – and that's being generous. The other 90% is smoke and mirrors intended to distract the suckers while their pockets are picked in every way imaginable.
Many folks already know about the major behavioral biases of investing – things like regret avoidance (not selling losers to avoid regret), recency bias (overweighting recent information), and overconfidence. But a quick search on Wikipedia returned an incredible 170 known and documented cognitive biases. At least half of them are relevant to investing.
Is it any wonder investing is difficult?
All of this is to say that investing isn't easy – and there are deep reasons why this is so.
The good news is, all of this can be overcome... for a cost. We must acknowledge the fundamental uncertainty of investing – and embrace it.
That's the basis of the "foolproof investing system" that I've been working on for the past 15 years. It is foolproof in the sense that it's "proofed against fools."
As Robert Cialdini says in his book Influence: The Psychology of Persuasion, "I can admit it freely now. All my life I've been a patsy."
Just as Cialdini researched the psychology of compliance to better understand it and to defend himself against mass-media "compliance practitioners," I've put together my investing system to protect myself and others from the market riggings.
So without further ado, here are my eight steps to foolproof investing...
- Find a source of good investment ideas (like those you'll find at Stansberry Research).
- Look for investments that are in uptrends.
- Invest in 10 to 15 different stocks and funds.
- Risk 1%-2% of your capital on each position.
- Determine your position sizes in a way that equally balances risk.
- Don't put all your eggs in one basket.
- Protect against volatility by complementing risky positions with less-risky ones.
- Exit when you hit your stop losses, and look for a new investment idea or wait for a re-entry trigger.
The great thing about this plan is that anyone can do it...
It lets you separate yourself from the investing herd and beat the markets... And it puts you in the driver's seat and makes investing the prosperous adventure it was meant to be.
Dr. Richard Smith
Editor's note: After the market's wild swings in recent months, many investors are at a loss for where stocks are headed. If that sounds like you, you're in luck... On Wednesday, February 13, at 8 p.m. Eastern time, Richard will join some of the world's most famous "bulls" and "bears" to address the major questions facing investors today and tell you what things you should consider before making any investment decisions this year. Save your spot for this free event right here.