What Investors Can Learn From the 7-1 World Cup Surprise: Risk Management

 

Brazil is a country that takes prides in its rich history of football. No, it’s more than that, football is part of its national identity.

 Brazil is the only country that has been able to win five World Cup championships, the ultimate prize in sports. They have also given the world some of the game’s greatest players such as Pele, Ronaldo, Ronaldinho, and more. All of this makes Brazilians’ overconfidence in this tournament no surprise. The nation felt entitled to World Cup glory. But Germany had other plans.

By now you have probably seen the crying faces of Brazilians all over the internet: men, women, and children looking more like they have just witnessed a national disaster. The 7-1 thrashing from Germany was completely unexpected. But we can learn something from their pain. No one is entitled to win. You can’t expect great outcomes when you have let chance play too big a role.

Let’s apply that to investing. In a strong bull market, we begin to start feeling invincible, and expect every one of our stocks to outperform our general expectations. Even when stocks begin to fall, we sometimes echo the Brazilian fans’ denial: “Not this stock. Look at those earnings!”

Don’t  fall into this trap. You won’t win just because you have before. Always read price and volume so you know what’s happening with the stocks you own. The reason why a stock falls usually takes time in getting out to the public. By that time, it’s too late to sell properly. Price and volume tells you what you need to know, when you need to know it.

Perhaps if Brazilians had been realistic about the serious blow of Neymar’s exit, Silva’s absence, the pressure of playing at home, there would have been fewer tears.

Certainly as investors, we need to be reminded that the first priority of investing is defense.  Keep your eyes on the general market and the price and volume action of your holdings and don’t be afraid to sell before you lose.

Best returns,

The MarketSmith Team

 

 

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