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Avoiding Unnecessary Risks In Firefighting And Investing

By Roger Nusbaum, AdvisorShares ETF Strategist Over the President’s Day weekend, I saw a big chunk of the movie Backdraft. This is the 1991 firefighting movie with Kurt Russell, Billy Baldwin and Robert De Niro. I was not involved with firefighting back then, so I don’t know how unrealistic the fire ground scenes were, but I can tell you that firefighting has changed dramatically versus how it was portrayed in the movie. There were a couple of different scenes where the crew went into burning buildings where there were no people believed to be, including some sort of chemical facility. There is a phrase in firefighting; risk a lot to save a lot, risk a little to save a little, risk nothing to save nothing. There is no empty building that is worth more than a firefighter’s life, going into a burning chemical factory (with no breathing apparatus mind you) is a totally unnecessary risk. The idea of suitable risk is obviously an important part of investing. About eight months ago I was on CNBC with the bear case for a newly IPO’d stock that I would describe as being a trendy gadget. The gadget itself is pretty neat and I have no doubt about the gadget’s ability to do what it is supposed to; my wife wants to get one. My main thesis was that from the top down the risk associated with buying a very expensive stock that produces a faddish item that had already enjoyed tremendous growth in sales before the IPO was simply unnecessary given how late we were in the market cycle. There was no attempt to predict what the market would do but six years into a bull market is late based on past market cycles. After five or six years or longer of rising markets it makes sense to avoid added risk or volatility in the portfolio. While there can be no absolutes it is a good bet that Giant Soda with 40 straight years of dividend increases is less volatile and less risky than Social Media Gadget Dot Com with a PE of 100 (neither Giant Soda or Social Media Gadget Dot Com are real companies). If there is a time to take on added volatility and risk, and for some investors this is totally unnecessary at any time, it would not be after years of a rallying market but when participants are most fearful after a large decline with media questioning why even own stocks. While most people know that buying low is the right thing to do, actually doing it is very difficult. An investment plan is unlikely to be derailed by being unable to pull the trigger in this manner but can be derailed by succumbing to greed at the market’s high and buying too much stock in a company that makes a trendy gadget. The one from my CNBC visit is down 46% from its first day of trading and down 68% from its peak. Even if it had gone up it would have been an unnecessary risk for most investors. The bigger point here is about probabilities. These things are obvious and plainly stated but are often lost in a forest for the trees type of perspective on markets and investing. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com .

Beat An Index Fund: 10 Ways You Can Outperform The Market

By Rupert Hargreaves It’s no secret that active investment managers have always struggled to outperform indexes, and this knowledge has sparked an explosion in the demand for low-cost index-tracking products. While this approach does ensure that your returns will be similar to those of the index, it also stops you from beating the market. If you have the time to conduct detailed investment research yourself, there’s no need to consign yourself to these average returns. Beating the index (whichever one you’re following) is possible if you’re willing to put in the effort, and this is something Tweedy, Browne recently looked at in one of their investing booklets titled, ” 10 Ways To B eat An Index: How Tweedy, Browne Strives to Provide Value Above the Index Return .” Click to enlarge 10 ways to beat an index Choose stocks with appealing investment characteristics that have produced market-beating returns in the past. Cover the entire market universe: Do not eliminate stocks from the research process that are either too big or too small. Significant undervaluation offer occurs among smaller companies that aren’t covered by Wall Street. Statistics and specifics: Conduct one-at-a-time specific company research that generates value-related, forward-looking information as well as insights that are not available elsewhere, coupled with statistical thinking about investments that is likely to lead to above-market returns on a diversified basis. No index mimicking: Focus on stocks with robust prospective return characteristics rather than attempting to beat the index by mimicking its composition. Stay as fully invested as possible: Research has shown that 80-90% of investment returns have occurred in spurts that amount to 2-7% of the total length of time of the holding period. The rest of the time the returns have been small. To quote Tweedy, Browne, “With stocks, you have to be in to win”. Keep turnover low: Low turnover reduces commission and tax costs as a percentage of the portfolio’s overall value. Keep transaction costs low (see above). Act like an owner: Follow Benjamin Graham’s advice that by buying shares you are buying a stake in the business, not a lottery ticket. Focus, focus, focus: Pay attention to your existing investments as well as potential new investments. Be aware of any changes in underlying business fundamentals and the competitive environment. Continuous improvement: When it comes to investing, you can never know enough, and by increasing your knowledge of investment characteristics and patterns associated with above-market returns, you’ll be able to understand what works in various market conditions and be prepared for any developments the market may choose to throw your way. Constantly sifting through the vast volumes of information out there on equities and equity markets will help you gain awareness of the best strategies, investments, opportunities, and indicators that are available to help you optimise your performance grow your wealth and beat the index. Disclosure: None.