Friday File: Some Risk Reduction Strategy, A Couple Watchlist Stocks, and Annual Review pt. 5

Thoughts on Risk Reduction, plus Annual Review pt. 5

By Travis Johnson, Stock Gumshoe, February 26, 2021

Crazy week, eh? I guess it’s telling that it was really only the most boring positions that stayed in the green during Thursday’s tough sledding. In my portfolio the only little signs of green that day were Five Point Holdings (FPH), which is basically a land bank, Kennedy-Wilson (KW), which is a real estate asset manager, and 3M (MMM), which has been paying a rising dividend for longer than I’ve been alive (I was born in 1970, should you be curious). Not many corners of the market were spared, and for a little while it looked like the whole world was selling everything just so they could buy some more GameStop (GME) shares to try to reignite that mania from last month… so with all of this craziness, what happens to my portfolio?

We can’t know the future, of course, though volatility is high in part because we’re all quite aware, thank you very much, that in the hottest parts of the market this looks a whole heckuva lot like the internet bubble that we saw build from 1996-2000 or so, with lots of wild stories of speculative excess and heretofore unseen valuations for the most popular stocks (and indeed, to some extent, for the market indices).

The biggest risk right now for any investor is probably getting over-leveraged because of momentum-driven enthusiasm, so I remain pleased that I’ve been able to avoid the temptation of trading on margin, and that I keep my options speculating as a small part of the portfolio. While it’s certainly possible for a great many investments in growth stocks to work out well over the next ten years or longer, even if we’re overpaying today… that doesn’t mean that positions built on borrowed money or options will have as easy a time working. Margin and leverage can have their place for the trader and the speculator in the short term sometimes, but they can be disastrous and destroy a tremendous amount of wealth in a crash, and if you don’t have time to rebuild from that I’ll just remind you to be really, really careful.

That’s a lesson that gets learned by new investors once a decade or so, the logic of “stocks go up over time” does not mean that borrowing money to double (or more) your investment exposure will work out, mostly because of the cruelty of margin ...

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