There is smart investing and not so smart investing.
Smart investors work with a trusted advisor(s) to develop a long term strategy that reflects their resources, risk profile, and other factors that are relevant to their specific circumstances. Smart investors avoid impulse transactions, understand their portfolios and remember that investing, as contrasted with speculating, is a long term undertaking.
Not so smart investors react to the news of the day, fail to recognize that investing and trading are not synonyms and rely on advice from unfamiliar sources that are not acting as fiduciaries. Worst of all, not so smart investors tend to be unfamiliar with all of the ramifications surrounding specific opportunities and may be unaware of the real risks.
For example, recent articles in The Wall Street Journal highlighted the huge losses that befell some uninformed speculators in oil futures, who apparently failed to understand that futures contracts are quite complicated and governed by rules that can result in losses that exceed the original investment. In other words, in some situations, zero is not the worst case. At the same time, knowledgeable producers, including a number of major oil companies and Mexico, were able to use futures contracts to hedge significant portions of their expected future production at prices averaging approximately $50 per barrel.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA