Sunday night was a great reminder that there are some types of risk that we can just never comprehend until we experience them.
I spent the night with all my family in one room – the room I felt was the safest in the house – furthest away from the trees and out of line of any exposed windows.
The eye wall of Irma was taking dead aim at our home as a category 2 hurricane. We had made all possible preparations but by the time the storm is upon you, it’s out of your hands. It’s quite a helpless feeling.
Thankfully we came through just fine. We lost some old trees, lost power and have some cleanup to do but life, limb and property are all intact.
The whole experience reminded me that there are just some experiences that we can never fully understand what’s at risk and how bad things can get until we experience them first hand.
I knew the “theory” of what a category 2 hurricane was before last night but I had little idea of the “reality” of a category 2 hurricane. Now I do… and I will never forget it.
We saw just last week how billionaire investor Bruce Berkowitz took a huge position in Sears Holding (SHLD) which fell as much as 60% and he took a small position in Leucadia (LUK) that rose over 40%.
I’m sure Berkowitz had plenty of theories about the risks and rewards of SHLD and LUK but I don’t think that he will ever forget the realities he has encountered.
That’s why I believe that the TradeStops Risk Rebalancer tool is the single most powerful tool in the TradeStops toolbox. It has consistently proven again and again that it almost always improves the performance of real investors whether they are novice investors or amongst the world’s most famous and accomplished investors.
By just putting more of his capital into his less volatile investments, like LUK, and less of his capital into his more volatile investments, like SHLD, Berkowitz could have dramatically improved his results.
Admittedly, Berkowitz is an extreme case. As we discussed last week, he has nearly all of his invested capital in just two different investment ideas!
But what about other billionaire investors like Warren Buffett and Bill Gates?
To answer this question we compiled the portfolios of 10 different billionaire investors. We gave all of them equal weight so that even though Warren Buffett is managing $162B and Berkowitz manages $1B, they both were equal contributors to this total billionaire portfolio.
We took all of the investment ideas of these 10 billionaires and only made one single change – we changed how much money was allocated to each investment by using the TradeStops Risk Rebalancer.
The results were impressive. By making just this one change, the collective performance of 10 of the world’s most successful investors was nearly doubled. Take a look…
These results were achieved by moving money from riskier stocks into stocks with less risk. You can see in the table below that the TradeStops Risk Rebalancer moved money out of the highest risk level groups (Medium, High and Sky High) and put that money into the Low Risk investment group.
What’s also interesting is that most of the outperformance from the Risk Rebalancer has occurred in just the past two years. From 2007 – 2015, the Risk Rebalanced portfolio kept pace with the billionaires alone.
Which brings me back to the hurricane analogy. You just never know when being “prepared for a storm” is really going to matter. You can buy generators and keep trees trimmed for a decade and wonder why you are bothering to go to all the trouble.
Then one day – whammo – being “risk balanced” pays off more than you ever imagined when reality blows theory out of the water.
Make more. Risk less. In investing and hurricanes,
Richard Smith, PhD
CEO & Founder, TradeStops