Stock Market Risk - Should You Play Offense Or Defense?
Investing usually falls into one of two strategies: defensive and offensive. A defensive investing strategy looks to avoid stock market risk as it uses long term investing to post steady, consistent gains. Over time, defensive investing is the most likely to achieve its long-term objectives because its strict investing guidelines seek to virtually eliminate risk in the stock market.
The second strategy is quite different. It is offensive in nature, looking to capitalize on opportunities that miss the radar of conventional thought. Offensive investing ignores or minimizes stock market risk as it looks to make rapid gains. The concept of risk reward ratios is skewed since the investor’s view of risk has been reduced, making the rewards seem even greater than they really are.
We can put offensive investing in the form of an example. Some kids play a game called “punch out” (a game I do not recommend to anyone.) Two kids stand face to face. The first kid proceeds to punch the other fleshy part of the shoulder. Next, the second kid does the same to the first. This continues until one of the kids can’t or won’t continue anymore, making the other kid the “winner”. Sounds like a lot of fun, doesn’t it? Investing in the stock market without considering the risk is kind of like this game; you punch away at the stock market, ignoring the risk, hoping to “win”. Unfortunately, the stock market risks are bigger and stronger than most investors realize, leaving them defeated and bruised.
This entire topic falls back to your stock trading plan. When you got into investing, what strategy did you define? If it was to get rich quick, you might as well have put your money into the lottery. If your goal was to make money, then let’s talk about a couple of things. First, defensive investing doesn’t mean you won’t make money; defensive investing means you take calculated risk and typically lower gains to consistently make money. This is not putting your money in a savings account and accepting 1.5% interest. You will ALWAYS encounter stock market risk but you can minimize that risk while still finding excellent profits.
Consider this. Benjamin Graham is considered the “Dean of the Stock Market”. He wrote a book outlining defensive investing over 70 years ago and its principles are still used today. One of his students was Warren Buffett, arguably the most successful investor in the history of Wall Street. Warren Buffett was so impressed by Benjamin Graham and his teachings that he named one of his children after Graham. If those principles worked for one of the most successful traders on Wall Street, why wouldn’t they work for you?
Look, you can still have your thrills; every day in the stock market is risky. With a volatile monster like the market, you never know exactly what will happen. But there’s a good side to all of this; you can make money, a lot of money, with a conservative approach. Do your fundamental analysis on companies that catch your eye. Consider a stock market trading system like Japanese Candlesticks to chart companies and form buying plans based on your research. Diversify your por