My Systemized Approach to Managing Risk and Investing Safely

Joel Wenger

United States
Stocks
Long-Term Investor

Who are you and what’s your story?

Hey Everyone, Joel Wenger here, owner of Invest-Safely.com.

First things first, I don’t work for an investment bank or financial firm, which makes me an amateur investor. But even as an amateur, the time I’ve spent on investing greatly exceeds Gladwell’s 10,000-hour rule.  And that first-hand experience is at the heart of Invest Safely.

Professionally, I spend my days providing strategic planning expertise to the automotive industry. So I may not be able to manage your money, but if you need help with strategy, hit me up!

My investing career didn’t start off well.  I did what most people do; followed the advice of financial experts.  Buy stocks for the long-term, etc I also watched those investments in electronics and internet stocks lose 90% of their value when the tech bubble popped (yeah, I’m old).

I was determined to recover what I lost, so I opened a trading account, grabbed a copy of Investors Business Daily, and started trading.  And then lost some money.  And then lost some more money. Talk about adding insult to injury!  Learning to trade during a bear market was frustrating, but I got the whole “humbling” process out of the way rather quickly. 

My professional career also got off to a rocky start.  Within the first few years, I experienced an acquisition via leveraged buy-out, corporate bankruptcy and restructuring, a recession, and the requisite “compensation adjustments”.

About that time, I read “Rich Dad Poor Dad” by Robert Kiyosaki; and I’m sure you can see where this is going.  The book was my real-world experience in story form:

  • Job security didn’t exist; what I actually wanted was income security
  • A good 401k match wasn’t a good retirement plan, it was just the first “must do”
  • My career plan needed to be a lot better than “work hard and get promoted”, because the relationship between pay and performance was tenuous at best
  • My financial plan needed to be a lot broader than “buy leading stocks with good financials” 

I loved the concept of personal financial statements and became obsessed with the idea of paying for expenses with investment income. I also realized many of my mistakes occurred long before I placed a buy order.

What do you invest in and why did you start investing?

It may sound cliche, but the number one asset I invest in is myself; personal/self-improvement, professional training, semi-clean diet, and exercise. Health is the ultimate wealth because you can earn/generate more money, but not time.

The second largest investment I’ve made is in terms of time; learning the process of investing and how to create trading systems. And I’m still investing in this area today. Continuously improving your process is the biggest difference-maker when it comes to long-term financial success.   

My first major financial investment was my undergrad and graduate degrees. Even my decision to attend Kettering University was largely based on their co-op program and how that would position me professionally and financially after graduation.  

I mainly invest in financial assets (1 of the 4 major asset classes). The investment instruments I use range from individual stocks and bonds, funds (ETFs, Mutual Funds, Hedge Funds, etc.), Partnerships & Trusts (MLPs, etc.).  There was even a time when I had a savings account earning 5% interest!   

I also trade derivative contracts (i.e. options) and own some physical assets and insurance contracts, but I consider those as separate from my “investing” activity.   

My portfolio sizes vary across account types and market conditions. When possible, I size them based on SIPC and/or FDIC rules for an added layer of insurance. As an amateur investor, capital preservation, limiting risk, and the consistency of returns are much more important than how big an account is at any particular time.         

Walk us through your process of identifying and executing on investment opportunities?

My investment philosophy is actually summed up really well in a quote from Ralph Waldo Emerson:

“As to methods there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble.”

Most people start with the methods, just like I did. And most people eventually have trouble, just like I did. Once I learned this lesson (and some principles),  I got a lot better at picking methods…meaning I stopped losing money!

The following list outlines my principles of investing safely:

  1. You must be responsible for your financial future.
  2. Always protect against losses.
  3. The only “good” investments are the ones that make you money.
  4. Always use a process to make investing decisions.
  5. Always trade using a structured set of rules.
  6. Continually measure the performance of your plan or system; there is always something that can be improved.
  7. Constantly pursue ways to reduce costs.
  8. Before you invest, you must understand personal finance, market factors, and money management techniques.
  9. Improving your results requires improving your system; tools alone will not improve your profits.
  10. Learn from your mistakes (i.e. losses); you’ve already paid for them.

(If you’re interested, I go into more detail about these principles on my site)

Don’t get me wrong, identifying and executing on opportunities is an important step, but it’s just one step.  

If you start there, you’ve gone straight to the “When and How”, skipping some critical guardrails (underlying principles) and key questions (the “Who, What, Where, and Why” in the planning phase of your investment).

When I’m in the planning phase and considering an opportunity, it has to “fit” with the overall strategy I’m trying to employ:

  • Who is going to trade (Me? Trading Program? An advisor? The Broker?)
  • What type of investment instrument am I using? (Stocks, Bonds, Funds, etc.)
  • Where am I going to trade? (401k? Margin Account? Digital Wallet?)
  • Why am I selecting that instrument? (Growth? Income? Speculation?) 

Then I go to:

  • When am I going to trade? (Conditions and/or triggers for entering AND exit the trade?)
  • How am I going to buy and sell? (Market Order, Limit Order, etc.)?

 And finally, but most importantly:

  • How much am I going to trade? (Position Sizing)?

Some people argue about which questions belong where or the order to answer them.  Neither of those issues are important.  What’s important is answering the questions and making sure everything fits together. Something as “simple” as picking where you want to invest can have a big impact on the success of your method.  The constraints in my 401k are much different than my margin account.  The available investment instruments are different, the number of trades I can make are different, accessing the returns is different.  Even the tax implications are different (hold that thought). 

Example? I didn’t develop the method I use for profiting from dividend stocks.  It’s from the site Dividend Growth Investor.  After I answered all the above questions, I was trying to find a method that fits.  Low and behold, that site had criteria that fit perfectly with the overall strategy I was trying to implement. 

In terms of skills and abilities, my experience in manufacturing really helped me when it came to thinking of investing as a process. Concepts like continuous improvement, lean, even tools like control plans create consistent and repeatable steps, making it a lot easier to see what’s working and what isn’t.  

Since you first started, what have you learned that has had the biggest impact on your success and the growth of your portfolio?

Making money from investing is a lot like starting your own business. Many people get into it with dreams of getting rich, full of enthusiasm, only to discover that investing takes dedicated time and effort.  And much of that is spent in areas they didn’t anticipate and have no interest in doing (What do you mean I have to analyze losing trades?  Why would I want to do that?).  Eventually, their enthusiasm wanes or they take on too much risk, a string of trades/investments move against them, and they fold or move on to something else.  The most successful investors I know actually consider investing as a business and treat it accordingly, and it’s why I spent a lot of time on processes and systems.   

My best year was 2020, but I’m guessing a lot of people can say that…and success is a terrible teacher anyway.  My worst year was 2011, and I learned a lot more from that experience.  I was developing a new trading system, and I didn’t account for wash-sales.  I broke even for the year but had a rather large tax bill from the capital gains adjustment when tax time rolled around.  The system used leveraged ETFs, which was a “poor” decision, because it contributed substantially to the wash sales.  But it was “good” in hindsight because I learned the difference between risk and volatility and have adjusted my systems accordingly. 

What books, platforms or resources have you found useful?

I’m old school; lots of excel spreadsheets, historical price data, charts, PowerPoint decks, and my TI-85. 

As far as online resources, I download price and volume data from Yahoo! Finance. I also use Finviz.com as a screener and stockcharts.com for price charts and basic technical analysis. I mentioned “Investors Business Daily” and “Dividend Growth Investor” before, and I’d be remiss if I didn’t mention the late Tony Caldero. He passed away a couple of years ago, but his site is still live and is an excellent resource for those interested in Elliott Wave (https://caldaro.wordpress.com/). 

I also subscribe to read weekly newsletters from John Mauldin (Thoughts from the Frontline), Steve Blumenthal (On My Radar), and Jared Dillian (The 10th Man).

Books by Michael Covel (Trendfollowing), Stridsman (Trading Systems That Work), and Victor Sperandeo (Trader Vic) laid the groundwork for most of the trading systems I’ve created. And while we’re on the topic of systems, I can’t forget the 4-hour workweek (Tim Ferriss).  It’s not really an investing book, but the concept of automating a system is an important part of the process. 

What advice would you give to someone who’s just starting out in investing?

How it Starts = Get Rich Quick 

How it’s Going = Get Poor Quicker

There are always articles about someone 10x-ing their account overnight. You won’t read about the thousands of other people who tried to do the same thing and their account is now a 1/10th the size…or how big that 10x account is 5 years later.  There’s an adage that describes stock prices as taking the stairs up, and the elevator down.  

Set yourself up for long-term success by getting your personal finances in order (pay off debt, automate your savings, optimize your spending) before you try your hand at investing.  That way, when you take a ride on the elevator (we all do at some point), you won’t go back to the ground floor, so to speak.

Position Sizing

Learn it, know it, live it.  Don’t put your money at risk anywhere at any time without figuring out how much you’re going to invest.  And how much money you’re going to invest is based on your maximum allowable loss, or how much you’re willing to risk.  In other words, how much money are you willing to lose before exiting a trade.         

Compounding is a Double-Edged Sword

Compounding is great when you’re winning, and terrible when you’re losing.  If you lose 7% on a trade, you have to generate 7.5% on your next trade to get back what you lost.  But there’s also an opportunity cost, in the form of the gains that you could have generated in the first place.  That’s why it’s SO important to keep your losses small and use position sizing.

Risk is NOT Volatility

You can make a high-risk investment in something with low volatility, just as easily as you can make a low-risk investment in something with high volatility. Volatility comes from price movements; how much and how often. You have no control over it. The level of risk you accept is how much money you’re willing to lose (see position sizing above). You have complete control over your position size, and therefore your risk.

Analyze Your Trades

I mentioned analyzing losing trades a bit earlier.  If learning techniques and principles is the starting point, and making money is the destination, then consistent application is the journey.  Analyzing your trades and overall performance measures your success or failure in applying what you’ve learned.  No one is going to force you to do it.  To give my readers some examples of what I mean, each week I publish a stock market outlook, based on technical analysis, as an example of how to “track” an investment and generate buy and sell signals.  At the start of each year, I estimate the performance of said hypothetical system, review the trades, what worked, what didn’t, and analyze why it didn’t work and what I’ll adjust in the next year (along with all the assumptions that the “model” is based upon).  You can check out the latest here.

What investment opportunities are you excited about at the moment?

Before I get to opportunities, a word of caution (I mean, I run a site called Invest Safely after all).  Investor behavior is eerily similar to 1999; the methods are different, but the principles are the same (see what I did there).  Back then, people went to Yahoo! Message boards for stock picks.  Today, they go to StockTwits and Reddit.  In both cases, fear of missing out led to questionable trades.  Back then, people were piling money into the latest internet company IPOs.  Today, people are piling money into SPAC’s for technology companies.  In both cases, new valuation methods were used to calculate or justify prices because there’s no substantial revenue yet.

The next decade will be a challenging time for investors, as many haven’t experienced anything other than a bull market…let alone a prolonged bear market. There will be a reckoning for the low cost of borrowing and high amount of debt the global economy has experienced. 

But there will be opportunities.  As much as investors fret about today’s market being overvalued, the reverse can also be true.  Terrific companies will eventually be on sale.  We’ll likely see high levels of inflation, which benefits physical assets like commodities and real estate.  Someone who has experience navigating the high yield bond market will be able to find once-in-a-lifetime yields.  Regionally, I expect Emerging Markets to outperform; they’ll have issues, just not as badly as the developed economies like the U.S. or Europe.   

And I’m very bullish on the United States as an innovation machine.  Challenging conditions will force companies to adapt, creating an incubation period for the next set of Amazons, Apples, and Alphabets. Consider the rapid innovation we’ve seen in mRNA technology driven by the coronavirus pandemic.  I believe this challenge has laid the groundwork for accelerating the advancement of personalized medicine and DNA-based immunotherapy.

Can you share a story about an investment opportunity that you passed on and went on to grow beyond your expectations?

Back in 2012, a co-worker and I were chatting about different types of investments, and he brought up an opportunity to invest in some new kind of digital currency called “Bitcoin”; Maybe you’ve heard of it?   

I passed.  My thinking was that there still wasn’t a mature “market” yet; limited access via a small number of “exchanges”, limited supply for “trading” and high price volatility, along with zero regulation or oversight meant Bitcoin wasn’t useful as a currency or a store of value…yet.  Most of those statements are still true, but that doesn’t seem to matter much.  In the end, all investments are worth what people are willing to pay for them.  And right now, that’s a lot! 

Where can readers go to learn more about you?

You can find info about me on my website, as well as a few other locations:

Thanks to
Joel Wenger

 for doing this interview.

If you have any questions or comments, leave a reply below.

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