Tag Archives: risk

There is No Secret Sauce

There is no secret sauce blog header



I’m going to let you in on a not so well-kept secret from the financial services industry. There is no secret sauce. There is no specific investment, decisions, technique, or strategy that is going to make you rich. There is no one thing you can do that is going to make you successful.

a picture of a special sauce


In fact, I’d be that if you gave up and stopped trying to find an easy one thing you can do to be successful, you would have a much higher chance of getting there.


You see, when it comes to money, building wealth is not a matter of making 1 or 2 correct decisions. Building real wealth is a series of small decisions that over time add up to generate enormous value.


Successful Investing Vs Getting Lucky

Successful Investing graphic


Record low interest rates, rich asset valuations, low inflation, and solid economic growth expected. The result? Speculative trading.

I’ve been getting more phone calls, emails, text messages and video calls from clients, friends, family and everyone else about purchasing speculative investments than I ever have before.

Now, the usual mantra is that by the time the retail investor gets involved, it becomes the pain trade. In other words if main street is finally rushing to plow their money into these investments as they soar in value, it means that there is likely nobody left to buy. It can be seen as a signal of a bubble or a market top.


stock chart falling


Now I’m not going to say whether this is or isn’t a bubble, because that is beyond the scope of this article. Also I don’t feel like people using this later and claiming I was wrong.

However, we do need to go over how to spot the difference between making a successful investment, and simply getting lucky.

This first method. If you are investing in something purely because you have seen it go up in value and are afraid of missing out, you have to acknowledge that you are in no way shape or form investing. You are purely speculating. Now this doesn’t mean you can’t make money speculating, but it does mean you are effectively gambling and have to time your entry and exit points in order to make a profit, before greed gets in the way.


gambling greed scrounging for money


The second method is to calculate your odds of success and compare that to your payout odds. I like to use a simple dice game when explaining this. Your job as an investor is to find an investment whose odds are in your favour. If you wanted to bet me $10 that you could guess the number to come up on a dice roll, you would have a 1/6 chance of being correct. To be fair, you would want a 6/1 payday. If we rolled it 6 times, you would pay me $10 X 6 = $60. If you were right 1 out of 6 times you would get paid 6/1 6*$10 = $60. Which means if we did this over and over again, statistically neither of us would have made or lost any money as these are balanced odds.


Dice and dice odds


If your investment has a 1/100 chance of working, but only pays out 20/1 those are terrible odds, even if you do successfully get paid 20x your money. If you can find an investment that has a 1/20 chance of working with a 100/1 pay out, then those are great odds and a very good investment.

You see, the reason people get lucky on speculative investments is that in the realm of statistics, anything that is possible to happen will eventually happen. For example, statistically speaking there is a chance of a racoon falling through your ceiling and landing on you in the next 5 seconds. Did it happen? No probably not, but here is the thing, it has happened, and it will happen again to somebody.


Raccoon falling on desk


What this means is that with millions of people buying and selling random speculative investments all the time, their will always be someone who hits it out of the park even though the odds of it happening were absolutely abysmal. The reason you hear about it, is people like to talk about when it happens, or that they heard of it happening. Do you ever hear people brag that their 10-year return on their balanced portfolio was 7%? No? Because it’s not exciting. You’ll hear about how someone turned $1,000 in penny stocks into $1,000,000. Even though it only happened to 1 in 1,000,000 people who tried.


Remember, just because you have heard of someone making lots of money on a speculative investment does not mean you should rush out and buy it. If you are comfortable with a small percentage going into speculative investments, then make that decision. However, don’t let the emotional fear of missing out dictate your investment strategy.





Emotional Capitulation and Your Investments


We all know that investments go up and they go down. The problem is how we handle the emotional roller coaster of watching our investments decline in value. As I am nowhere near qualified to act as a psychologist, my thoughts and ideas are my own as to why this happens. I base this on having watched hundreds of clients experience this dilemma and have even experienced it myself multiple times.


Everyone’s heard of the fight or flight response. It’s that fear response that picks up any time we feel threatened. This can be a physical threat, emotional threat, or in this case a financial threat.


When you see your investments going down in value, this fight or flight response kicks in. We have this instinctive reflex to try to avoid as much pain as possible. Our emotional response is to try to do something, sometimes anything, when the rational and logical strategy would be to simply stay put.


It’s why we move on from underperforming investments at the worst times and chase the high flyers even though we know we should never sell low and buy high. It’s why when the market is plunging we desperately attempt to time the market and sell out as it’s falling, with an illogical hope of timing the bottom and buying back in.



Then what can we do about it, and how do we avoid it?


Economic Collapse: A risk worth worrying about?



Economic Collapse. Yes, it’s a real risk, societies have risen and collapsed all throughout history. Each time the people thought this time was different and that they were too smart or knowledgeable to allow it to happen again. With a global pandemic shaking the world, fascism on the rise, and countries moving more towards isolation than cooperation, an economic collapse is a real risk.



The good news is it is not a risk worth worrying about. Why not? Well you can worry about it all day and accomplish nothing. The reality is it still has an exceptionally low probability of occurring. Since this is an investment related blog, let us discuss how it would impact your finances.


When clients discuss their investments with us, there is always that fear in the back of their mind that they might some how lose it all. A risk, which would only come to fruition due to an economic collapse so bad that our society never recovered from it. In this scenario, everything would be worthless. Yes, your stocks would be worthless, as would your house, your cash, your car, your gold, etc etc.



I like to explain this to people by using a rollercoaster metaphor about why you shouldn’t concern yourself with he risk of this happening, as you are subject to it whether you invest in the market or not.