How much potential upside can you legitimately expect vs. your downside risk? The reason this matters is that all stock-pickers are imperfect. Nobody should expect to be right every time. Indeed, if you are right half the time, consider yourself above average. That’s why risk/reward is so important. The investor who bats .500 must not only offset his losses but also his commissions on all trades, and his taxes on the winners.
Barry Ritholtz, “Apprenticed Investor: Six Keys to Stock Selection,” The Street, August 9, 2005.
The above gospel was written by Ritholtz the Great in the third dynasty, 2005 B.C. (before crisis).
It was a more innocent time.
During the third dynasty, all had blissfully experienced—count them—one-two-three effortless bull markets with not a bear-market pain in sight.
Ritholtz, he of the “aquiline nose and strong jaw,” used a baseball metaphor to describe our god-given right to be wrong in picking stocks. (I respectfully suggest his Pharaohness is just plain wrong and .500 is overly generous. Given a shorter vista, you will bat say, .280, and be lucky to stay in the game.)
I bring all this up as here in the Modern Age, 2013 A.D. (after deleveraging), Ritholtz the Great is on to something.
This morning, Richard, producer of Surveillance, said, “any any all stock-pickers and securities analysts are losers because they are mostly always wrong.”
Sage Richard is correct. They are imperfect in a mostly-always way.
The Street gets this; the media do not.
The heart of the matter is we are in a four-year bull market and no one is in the investment baseball game. We, shattered, have lost the big picture.
Read Barry Ritholtz at his wonderful The Big Picture website to summon the courage of 2005. Stop with the delusion of the media that equity selection is an approximate .800 game. (And yes, Jim Cramer is not as evil as the critics claim. James, of the Phillies, knows it is a .280 world.)
We are all scarred from this financial crisis. We need to relearn investing is imperfect. We need to be in the game. And we need to learn anew how to strike out and walk back to the dugout with grace. Discuss.