Our investment philosophy is fairly simple.
Minimize Losses and Maximize Returns, and use the power of compounding to further grow the portfolio over time.
Sounds like common sense.
But this philosophy is one of the hardest things to learn and practice in the investment process. In the near-daily pursuit of best possible returns and the heat-of-the-moment investment decisions, investors often willfully or unwittingly disregard the most common rules of investing. Often times in a hard situation, when emotions are running high, these rules are the first casualty.
Everyone likes to talk only about profits. But in the stock market, losses are more frequent than you get to read about.
Minimizing Losses and Maximizing Returns can occur consistently if investors deliberately pursue a disciplined investing system. They need to operate within the rules of the system that they develop or adopt. When investors begin to operate out of the investment system, which is designed to protect them by securing gains and limiting losses, they expose themselves to the possibility of greater losses.
Financial markets operate on a risk-reward basis. An investor cannot completely foresee or forecast the entire gamut of economic and non-economic scenarios that may occur and affect the investment performance. Consequently, there is no point in seeking an investment strategy in the stock market that completely avoids risk and losses. There are other financial instruments more appropriate for a no-loss, no-risk strategy.
Once you trust an investing system and begin to follow it with great discipline, you should then allow your investment gains to accumulate over time. Leverage compounding as a tool to grow your investment wealth in the stock market. The strong return opportunities presented by the stock market over the long-term can unleash tremendous wealth when combined with compounding. Albert Einstein, the great physicist, was so enamored by the concept of compounding that he termed it as his favorite kind of numbers. A prudent investor will significantly enhance the prospects for investment wealth by pursuing the promise of compounding. We can grow returns through both stock selection and compounding. But it's not easy to compound in a stock market, and here's why.
Compounding works predictably in a bank deposit environment, because the nominal returns are positive. The trickiness of compounding within an uncertain environment of a stock market is that it can hurt us equally bad if the returns are negative in a year or consecutive years. Now we don't want to be in a permanent Buy & Hold strategy to make compounding work. Thus, it was clear to us that negative returns over time will throttle the benefits of compounding. For compounding to work, we had to manage our losses to avoid or minimize negative returns. So we needed two things in our investment system:
First, an emphasis on risk management, which limited the losses and diminished the probability of negative annual returns, and
Second, a great stock selection investment process whereby we can create a portfolio that provides significant upside opportunity.
Thus, we believe, if we can manage the downside, then the upside takes care of itself. By taking care of the downside first, we are convinced we have a better chance of growing our upside. That is why we say Minimize Losses and Maximize Profits, rather than the usual phrase of Maximize Profits and Minimize Losses.
With that in mind, we created the Graycell model portfolio products. These investment newsletters have a precise focus - whether it be the industries that are targeted or the risk/reward characteristics that are assumed. Risk can be wisely used to build wealth over time. Our strong belief is that an investment system with clearly defined rules that allow us to control and minimize our losses while allowing our investments reasonable flexibility to grow, will deliver index-beating performance over time on a consistent basis. Compounding can then further enhance these returns over time. Our investment models have been successful in executing our philosophy through our investment approach in varied market environments.