DMITRY BALYASNY: I think the key was really money management and timing, and the two go hand in hand. So most people really focus on what, as opposed to the when and the how much. And the when and how much are usually more important than the what.
MAGGIE LAKE: When Kyle Bass sat down to interview John Burbank for the first time on "Real Vision" back in 2015, the first thing he asked him was how he sized his positions. In another one of our interviews, Mark Ritchie II explained why he rarely talks trade ideas with other traders and is instead far more interested in discussing position sizing. This broad concept of trade execution and risk management is where skilled investors spend most of their time.
So in this module, we move away from generating ideas to expressing them in a portfolio. As we said at the beginning of this journey, you might have the best idea. But unless you find the right execution in terms of investment expression and risk management, you will lose money. I was right overall, but I was wrong on timing is another way of saying, I lost money. Let's be clear about one thing. If you're in the business of trading and investing, then you are in the business of managing risk. You are buying risk where you believe it is priced too cheaply and selling risk that you believe is too expensive.
Every asset carries with it some degree of risk, even cash and government bonds. The question then becomes, how much risk are you willing to take for the probable return, given the scenario of likely outcomes? Here at "Real Vision," we don't offer investment advice per se, but we do present the frameworks and approaches of the best in the business and try to pass it on to you. And that's a theme that will continue to come up time and again, unpacking a framework for you to make it your own.
For example, you don't have to own gold or bonds in your portfolio to be diversified. It might be very important to you that you own your own home and you assign a huge amount of value to that. That could be your safer asset allocation. And even if housing does fall 10%, you still got to live in it and call it home. So in that case, there's a utility to that investment, and there's value in that. You might not even see it as an investment if you bought it for personal reasons, rather than speculation.
On the flip side, you might not want to invest in equities because they're priced too high. But you do want risk exposure, so you speculate in crypto. Either way, we want to give you principles and then for you to fill in the blanks according to your style and needs. Don't forget, there are many different ways to take advantage of an investment theme, but the risk management principles are broadly the same.
Speaking of styles, how should one approach managing risk? Well, there are some golden rules that you should be aware of, whether you're buying stocks or investing in your best friend's restaurant. Size your position responsibly so that you can scale into it or cut a small loss. Only ever invest what you can afford to lose. Leverage is the silent killer. Diversify your broad investment portfolio. Think holistically about your job, assets, and other income streams and the needs of your family, if you have one.
Understand liquidity. In other words, can you exit the position easily if you need the cash? Be sure to understand the sorts of risks your portfolio is subject to. Financial risks come in various forms, not just market sector stock risk, but also liquidity, counterparty, political, and many other less obvious ones. And above all, be honest about your investment case. It's always worth asking, do I need to have this trade or investment on? Is it adding or subtracting from my portfolio and life?
So that's the first thing, be honest about why you're doing what you're doing. Secondly, sizing is everything. You might have your timing wrong. But if your position size is small enough, you can endure a tough market, stay in the game and get used to your position, or exit at a small loss and reassess.
As Jamie says in the discussion, quoting several investors, the fastest learning curve to investing is going out there and doing it using the position size you're comfortable with. In other situations, volatility can pick up for some unforeseen reason, and you need to be able to handle that. This is another reason why proactively managing position sizing and overall portfolio exposure is critical. There's nothing worse than being correct but not being in the position when it played out because you couldn't afford to hang around.
In fact, we're about to talk about stop losses, and that's a tactic you should certainly look to employ. At least try it out to see if it fits your style. Stop losses basically mean that you always live to fight another day. Something might be trading at $50 and you think it's worth $70. But if it hits $45, then you're happy to admit you're wrong. It doesn't mean you can't jump back in once things have settled, but it keeps you in the game for longer.
This part of our journey is where all the investigation and analysis you've done so far moves from concepts to ideas to actionable items. By the end, you'll be able to integrate who you are as an investor, your goals, and your appetite for risk into a well-thought-out plan that you can execute. You'll be able to express different investment ideas, determine your entry and exit points, stop loss, and position size and combine all of that in a cohesive portfolio that you manage proactively. So if the context changes, you're prepared. Let's dive in.