The Weekend Edition is pulled from the daily Stansberry Digest.
Today's essay is the product of emotional upheaval, not study or research...
It's as much about life as it is about investing.
The inevitable, solemn journey to this day started about a year ago...
My brother called and told me that my then-92-year-old mom was not long for this world... She was suffering from end-stage chronic obstructive pulmonary disease, having smoked cigarettes from her early teens until her early 60s.
Then, in early November 2019, Mom fell and broke her elbow, wrist, and pelvis. I dropped everything and flew back home to be by her side for what I thought was the last time.
Mom was tough. She was born in 1927 and grew up during the Great Depression. Her mother died just after giving birth to my mom, and her father abandoned his five daughters when my mom was just a child.
I was relieved – and not surprised at all – when she recovered... and hung on for another (increasingly difficult) 10 months.
But finally, mercifully, Mom went to her great reward on September 1, 2020 at age 93... In her time on Earth, she lived through 71 years of marriage, raised seven children, and loved 22 grandchildren and nine great-grandchildren with all her heart.
When your mom dies, the bottom drops out of your world. And given my parents' greater-than-average longevity, I bet many readers know exactly what I mean.
Still, although it's one of the most unpleasant experiences in life, it's valuable to have your world upended...
I hope to impart a modest bit of wisdom – about life and investing – based on how I've felt after my mom's passing.
Among other lessons is one about volatility. Smooth, stable gains in financial markets, as in life, are always temporary... and mostly an illusion.
Life and markets are both filled with nonlinear jolts and shocks. Your ability to handle these upheavals can approach life-and-death importance. And in your investing activities, it could be the difference between capital preservation and financial ruin.
I often say, "Prepare. Don't predict." Salespeople are often told to remember, "ABC: Always Be Closing." So, in that vein, I'll tweak my perennial advice a bit...
ABP: Always Be Preparing.
Prepare for the jolts and shocks that you'll inevitably face in the markets... They always come too soon and last too long. Stockpiling cash and gold can help you here. But that's only part of it...
When I've thought about investing at all recently, I've focused on one specific idea...
I've contemplated how personal it is for those folks who, like you and me, have decided to build our own portfolios from the bottom up... one decision at a time... with no one to answer to but ourselves.
Now, the editors at Stansberry Research can – and in my thoroughly biased opinion, do – give great advice and provide you with many excellent investing ideas and insights.
But that's not all it takes... The rubber meets the road, and money is made and lost only by your own buying, holding, and selling. And it's up to you – and only you – to get those decisions right over your investment career.
Investing is hard, and doing it on your own requires that you know yourself...
According to ancient Greek legend, 147 maxims were inscribed in and around the Temple of Apollo at Delphi (which is in ruins today). A maxim is a short statement, usually expressing a rule of conduct or general truth.
The most famous of these rules of conduct were the three "entrance maxims" inscribed on the forecourt of the temple. And as you'll see, thousands of years later, these fundamental concepts can still serve as a guide for your investing journey – and your everyday life...
The first Delphic entrance maxim is "Know yourself"...
Knowing yourself can mean many things to an investor...
Perhaps most important of all, you need to know how you're most likely to behave under a wide variety of possible future scenarios.
For example, you might tell yourself you're a long-term investor who can ride out the bad times without fear. But in reality, you're the kind of person who gets scared and sells everything whenever the stock market falls 10%.
When you decide to buy, you can't do it blindly. Remember, always be preparing... You must buy today with an idea of how you'll decide to hold or sell tomorrow.
The difficulty of knowing how you'll behave in an unknowable future is why every editor at Stansberry uses a trailing stop or some other type of exit strategy with every single recommendation.
No matter what the future holds... honoring your stops is an action you can use to protect your assets and help you grow into a successful investor. It also engenders self-trust, one of the great payoffs of greater self-knowledge.
Knowing yourself also means spending time on those investment ideas where you're likely to make the best decisions. It means being able to look at an investment idea and know without too much trouble, "That's not for me," or, "Yep, that's my kind of investment."
Although we guide you here at Stansberry, it's ultimately your money and your decision. You have to know yourself to bridge the gap between our advice and your actions.
Next up, we have the second Delphic entrance maxim – "Nothing in Excess"...
This doesn't just mean don't eat or drink too much.
It also means you must know your limitations in life and in investing. Legendary investor Warren Buffett tells investors to stay inside their "circle of competence." He stated...
Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital.
I stick mostly to bottom-up, one-stock-at-a-time analysis from a long-term, value-oriented viewpoint. That's what I've been doing the longest, and it's what I'm best at. I don't do a lot of short-term trading or technical analysis because that's not in my circle of competence.
By all means, work to increase your knowledge and skills... But at the same time, know your limits and understand that you'll be most effective when operating within them.
One easy way to avoid excess is to never put all your money into a single position...
I've seen research that suggests owning between 12 and 18 stocks provides 90% of the maximum benefits of diversification, but even that only goes so far.
If you have all your money in 12 to 18 tech stocks or 12 to 18 mining stocks, you're reducing the risk of focusing on a single stock in those sectors... But when it comes down to it, you're not truly diversified. If that sector goes bust, you're in trouble.
And because of that, you're violating the second Delphic entrance maxim.
To honor this maxim, practice what I've repeatedly referred to as true diversification...
If all your money is in stocks and bonds, that's not true diversification. You should also have some assets outside the financial system – like precious metals and bitcoin.
You can also honor the second maxim by avoiding excessive buying and selling. This is sometimes referred to as "overtrading your account."
You should never trade unless your system indicates it's time to trade. And if you don't have a well-conceived system, you have no business trading at all.
No signal, no trade. Period.
I also avoid excess by reducing the amount of time I spend looking at my stock, bond, and option holdings. I use price alerts to avoid wasting time logging in and out of multiple accounts. Most online brokers offer some type of alerts, and our corporate affiliate TradeSmith does that, too.
Avoiding excess tends to imbue investors with a sense of humility.
And that brings us to the third Delphic entrance maxim – "Surety Brings Ruin"...
Surety means overconfidence. For investors, this is likely the most toxic emotion of all.
Wait several years and talk to anyone who's buying shares of the "FAANG" stocks today because they're certain no business will ever equal them for decades to come.
I bet they'll be able to tell you all about how surety brought ruin. Or maybe it won't work out that way... Maybe I'll be the one telling you that because I didn't own these stocks.
I don't claim to know the future. But I've seen this movie before... and I know how it ends.
As a young musician, I studied complicated pieces in the practice room... But when I tried to play in front of my classmates, I struggled and gave error-ridden performances. I quickly and painfully learned that I could only perform the most difficult repertoire once I'd developed beyond that level.
I learned never to try to perform at 100% of my capacity during a performance. Instead, I would perform at a more comfortable 80% capacity... in part because that 100% mark isn't always clear. Only through avoiding overconfidence could I project true confidence on stage.
Another indication of overconfidence is in investors' sell strategies... or lack thereof.
They're either certain they don't need one, or maybe haven't yet suffered enough to understand the need for one. And the longer these folks go without one, the more certain it is they'll suffer the consequences of overconfidence.
Sell strategy is a prominent cornerstone of the advice we give at Stansberry Research...
Even before our company came into existence two decades ago, my friend and colleague Steve Sjuggerud started using stops after his experience as a broker.
During that time, Steve saw too many individual investors hang on to losing positions. They were overconfident, and surety brought ruin to many of them.
It was painful for Steve to watch... so he vowed not to let it happen to himself or anyone asking him for advice. That led him to pioneer the use of trailing stops in our industry. The TradeStops risk-management platform would very likely not even exist without Steve's highly disciplined approach to cutting losses and protecting profits through trailing stops.
That's why, as I said earlier, we all use risk controls – whether trailing stops or other considerations – with everything we recommend at Stansberry. We've all had the experience of either being overconfident ourselves... or watching others get ruined by this violation of the third Delphic entrance maxim.
Ruin isn't a fun topic for anyone to think about, but you still must understand how to avoid it...
Some people get wiped out and never come back. Some folks come back, but they never learn to tame overconfidence. Both types of investors fail to make money in stocks.
The ancient Greeks sure seem like they knew a lot. I can hardly think of a better set of foundational principles for investing and life...
- Know Yourself
- Nothing in Excess
- Surety Brings Ruin
I hope you've gained something valuable in today's essay from my philosophical mood, born as it was of loss and sadness. I bet you've learned from losses you've suffered, too...
I read Samuel Taylor Coleridge's classic poem, The Rime of the Ancient Mariner, as a freshman in college. More than three decades later, I remember little about the poem except that the ancient mariner tells a tale to a man on his way to a wedding.
But despite being unable to recall most of the details, I'll never forget the ending... After hearing the mariner's story, the wedding guest emerged "a sadder and a wiser man."
Every experienced investor can identify with that.
And the wisdom of experience tells us this: Survival is all-important. If you can just survive for a long time in the stock market, you'll make plenty of money. Avoid the big losses... and the life-changing gains will come.
Good investing,
Dan Ferris
Editor's note: The stock market has soared more than 60% since the crash in March. But the Melt Down is coming... And it will arrive at the exact moment you least expect it. That's why Steve says it's time to get your exit plan in place – right now – so you can set yourself up for lower risk, higher reward, and less stress when the downtrend begins... Click here to learn more.
