The art and practice of making sound investments combines many faculties, from experience to education and intuition. Yet in spite of this, anyone can learn the basics of how to make a solid and dependable return on traded assets. Below we’ll be looking at the core fundamentals every burgeoning trader should know about before committing their resources to backing an asset.
Hedging and Risk Management
Risk management is a key factor in any sound investment strategy. One of the best ways to ensure you’re actively managing the potential risks of an investment is to also back the opposing position in a closely related asset. This is referred to as a hedging. There’s a popular genre of proverbs that attest to the wisdom of this strategy, for example: “Always love thy neighbour, and always pick a good neighbourhood to live in”. This speaks to the essence of what hedging is about. It’s a means by which you can maximise the potential fall-out from any risk you take.
You’ll find instances of hedging in all walks of life. For example, one of the most common means by which people encounter this word in this day to day is through the idiom “to hedge one’s bets”. SBO.net, a leading bookmaker for sports events, outlines the basic principles of this process – which is known in the industry as arbitrage betting, or arbing. They state that this is a means by which a bettor can play the market’s spread of probabilities to their advantage. By betting on outcomes for the same event with polarised odds, a bettor can ensure that regardless of outcome, they will make a return.
This is considered a low risk strategy, as by mitigating the risk of the greater loss you also necessarily shield yourself from a higher win. For responsible sports fans and the like, this is a great way to participate in a wager without risking overextension of one’s resources. It’s easy to see then why this strategy is not only a good idea when applied to the realm of investment, but in fact extremely wise. Building wealth over a long period of time, such as with respect to a retirement fund, favours hedge investment.
This is because there’s little point opening one’s self to the risk of making a major loss with respect to a pool of funds that you require to remain stable. This type of investment is never going to deliver the type of returns associated with trading with more liquid assets, or through utilising higher risk strategies such as shorting. However, it does enable investors to participate in the global stock market while simultaneously largely insulating themselves from the intrinsics risk this presents.
There’s no substitute for research when it comes to understanding market trends, emergent sectors and valued commodities. Consider that Warren Buffett, arguably the most successful investor of the 20th century, who amassed a fortune of over $60 billion through making sound investments, prioritises research and knowledge above all else when making decisions on where to place his funds.
In the early part of his career he was known to read in excess of 500 pages a day, spending around 80% of the time he was awake reading diverse works on every topic imaginable. Not only did this give him a clear insight into many subjects his rivals would be ignorant of, it also honed his ability to parse information and critically assess lines of reasoning.
Nowadays, in addition to keeping up his voracious book habit, albeit to a lesser extent, he reads 6 newspapers every day. These are: The Financial Times, The Wall Street Journal, USA Today, The New York Times, American Banker and the Omaha World-Herald. By reading a broad spread of opinions and perspectives from across the political spectrum, Buffet is better able to take the pulse of the very public opinion that drives demand in the marketplace.
In our modern age the risk of walling one’s self up inside an echo chamber of opinions and perspectives that validate our own beliefs have never been greater thanks to the omnipresence of algorithms on social media platforms that curate what we want to see. In striving to break out of this, sage investors can see the wood for the trees and identify emerging trends ahead of their rivals.