Wise up: There’s now far more risks than likely rewards!

By Raymond Mullaney

The stock market is very risky because it can fall 40% or more at any time. No one knows when crashes will occur, but there are times when markets are more likely to crash. Individual stocks are also very risky because any of them can crash – yet some far more likely than others. The risks of an individual stock or a major market decline can be measured. The measure of risks will not show you what the market will do, but it will give you a reliable indication of how much you may lose by investing.

We can learn from history; success and failure leave clues. Taking inflation, fees, and taxes into account, the market has been up seven times and down seven times. Buy at the right time and you can enjoy fantastic gains. Buy at the wrong time and you may face financial ruin. Without a method to tell which times are right and which are wrong, you could easily invest over your whole lifetime and come out of it no better off than you started.

Timing is crucial. If you overpay for stocks, and the market crashes, you may never recover your losses!

Fortunately, history has painted a vibrantly clear picture for us to learn from. The safest and most profitable times to invest have been the periods after major market declines and crashes. The greatest threat to your investments is buying after the market has had a long run-up. Greed keeps investors in too long. Those who enter the market after substantial market appreciation and remain invested for too long have often suffered very serious and permanent losses. The second greatest risk is paying more for stocks than a conservative estimate of their current net value. When investors buy in the wrong period and pay many times more than a company’s current net value, the risks of losing money approach 100%. We may now be in such a period. Can you afford to take such a chance with your retirement funds?

Unfortunately for investors, investment advisors and financial planners get paid exclusively to get you in the market and keep you invested at all times, regardless of the risks. The way most advisors get paid presents two insurmountable conflicts: Advisors suffer no real financial penalty when accounts decline beyond a specific threshold, and they have no incentive to take your money out of the market in anticipation of a significant decline. Most advisors have everything to gain by leaving your money in the market at all times and everything to lose by taking that money out. Moreover, an advisor stops getting paid when they take your money out of the market. And as Upton Sinclair says, “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

These two conflicts can produce disaster for investors. Therefore, you need to rethink the way you compensate your advisor, so that his interest in getting paid aligns with your interest of protecting your money, relieving him of the need to speculate with it just to keep your business.

We are risk analysts. Our methods were developed from the work of two outstanding men: Benjamin Graham, who became very wealthy and inspired many others to follow in his footsteps, and James Tobin, Ph.D., who won a Nobel Prize. We do not know if the market will rise or fall. By our calculations, however, current market prices far exceed a conservative estimate of the replacement cost of most companies. Therefore, we see great risks at current prices. The future could be very positive and drive prices higher, but that’s a big gamble. Based on today’s facts, stocks prices are very risky.

Rather than keep all your money invested at all times, why not invest only after major market declines, when the probabilities most clearly and greatly favor your success? When investors buy shares of companies for less than the replacement value and cost of a company’s real assets, they have the most to gain and the least to lose. Such times have always been very rewarding!

Stop investing in risky securities. “Risk” is the difference between the price of a security and the current minimum value of that security. All too often, investors mentally equate the two measures. They believe that if a stock is priced at $60 per share, it must be worth $60 a share. Nothing could be further from the truth! Instead, stock prices are largely determined by the opinions of buyers and sellers!

There are over 50 million investors all trying to find bargains within a universe of only 2,000 or so individual stocks of any size. In every market for every product, the greater the demand, given a fixed supply, the higher the price. This extreme imbalance between supply and demand makes finding stocks at reasonable prices all but impossible, except during market panics. To protect yourself from overpaying and suffering the losses that invariably follow, you must follow a discipline of refusing to pay more than a reliable estimate of a company’s minimum net tangible value.

You only retire once. That’s the way it should be.

I wish you happy, and careful, investing!