Money management: strategy vs. gimmicks and why it matters

Here’s a staggering fact: over the last two decades, literally tens of millions of investors set up individual brokerage accounts to manage their own investment portfolios. But most of them by far lose money. According to an 11-year study published by the UK’s Financial Conduct Authority, as many as 82 percent of all retail investors and traders lose money. This is confirmed by the figures disclosed by retail brokers themselves showing that up to 81% of their clients lose money. And this is in spite of the fact that since 2009 investors enjoyed the longest running bull market ever recorded.

This is in spite of the fact that over the last decade we’ve experienced the greatest bull market in history and every stock investor should have made bundles.

The disconnect and why this matters

The problem, I think is primarily rooted in short-term thinking, trading with flawed strategies or with no strategy at all. But portfolio management is much too important to pursue with half-baked strategies or to treat it as entertainment. 

We should take a moment to ponder the obvious: why is investment management important? Why do we have to speculate at all? I think that almost everyone intuitively understands that in our current monetary system, the currency’s purchasing power is being continually diluted through inflation. This predictably eats away at the value of our savings over time, so if we save our money for the rainy day in a mattress, by the time that rainy day arrives, that money might not be worth very much. At the same time the “safe” investments are yielding close to zero returns. So this obliges us to take risks and make investments that can generate positive returns. 

This is not just a profane question of speculation for the sake of speculating or about gambling – it is about managing our savings and building our wealth – and this is extremely important because our wealth has a very strong impact on quality of life and ultimately also on personal liberty. Thomas Paine said that money had something sacred in it – something not to be sported with, or trusted to the airy bubble of paper currency.

Thomas Paine’s slightly younger contemporary, Alexander Hamilton linked the question of money to liberty:

So, the question of managing our investment portfolios isn’t about making a quick buck speculating – it is the matter of preserving and growing your wealth, it is the matter of your life’s quality and even liberty. For many investors and traders adopting this approach requires a mindset change.

The requisite mindset change

What we know from some retail brokers is that most of their clients do what they call ‘message board trading,’ – short-term transactions in-and-out of the most popular securities for a quick gain. Also, many traders use their accounts with the idea of making X many dollars or euros per day to supplement their incomes. That may be a sensible desire, but desire is not a strategy. Still others use trading as a form of entertainment and some brokers have clearly exploited this inclination by modelling their services to look like trading games. However, none of this is investing – it’s gambling, and as a rule, the results will prove disappointing. To avoid losing money and to grow your wealth for the long haul, you need a more disciplined, strategic approach.

Gimmicks vs. strategy

Investing should properly be regarded as a lifelong pursuit. Success should be measured by how much one can increase their wealth over time. Unlike gambling, which regularly ends in tears, investing should gradually grow our wealth, improve our life, expand our options and enhance our personal liberty. To be a successful investor, we should commit to a lifetime of learning: we should study markets and economics, but also our own psychology which will prove the ultimate deciding factor. It wasn’t for nothing that Benjamin Graham said that the “the investor’s chief problem – and even his worst enemy – is likely to be himself.”

The importance of learning

It should be obvious that in tackling any complex challenge, we must devote some effort to studying the subject matter. The best hunters read books about hunting; best chess players studiously read chess texts; top race car drivers read books about cars, about engines, about driving, and so on. Almost without exception, the most successful money managers spend a great deal of time studying everything that’s relevant to their work. Ultimately, the knowledge we acquire and build up over time should protect us from the many pitfalls and errors in trading.

The story of the Desert Fox

We’ll consider just one concrete example in the way this studious approach to a challenge can be decisive between success and failure. This story is centered in the military clash between German troops and allied forces in North Africa during World War II. At that time, the control of key Mediterranean ports on the coast of Africa and of the Suez Canal was hugely important to the British empire and to the allied war effort. When Mussolini attempted to seize control of Egypt, the British deployed their army and quickly pushed the Italian troops back far across the desert into Libya.

To counter the British and help his ally, in 1941 Hitler deployed an expeditionary force, the Afrika Korps under the command of General Erwin Rommel. Rommel had built up a reputation of phenomenal personal courage. His soldiers idolized him and completely trusted him. During the battles, it seemed that his spirit permeated all his troops and they invariably fought with extraordinary courage and determination. This all earned him great respect even among his enemies.

For two years, Rommel’s troops struck terror with the Allied forces. Against the odds and even with his troops outnumbered 3 to 1, Rommel ran circles around his enemies, winning battle after battle. For example in June 1942 his forces took control of Tobruk which was a strategic port of huge importance for the British. The Germans captured a large contingent of the British troops with less than half as many soldiers. This was a huge defeat and a massive humiliation for the British.

Such exploits built up a fearsome aura of invincibility for Rommel’s forces; they enjoyed high morale while at the same time allied troops spoke of Rommel with fear and respect. Even in battles when his forces were depleted, at one point with only some 30 tanks remaining, his enemies still widely expected Rommel to win. Exasperated, Winston Churchill cried out in the House of Commons, “What else matters but beating him?”

To defeat Rommel, in August 1942 Churchill sent a very large reinforcement and a new command for the British troops. The Americans also sent a large contingent armed with an arsenal of American made weaponry including the brand new Sherman tanks. The American troops were motivated and highly confident but their first engagement with Rommel’s troops quickly crushed their morale: in November 1942, the Americans launched an attack on German positions but suffered a disastrous defeat. In the second attack, Rommel’s troops destroyed all of the Americans’ tanks – as many as 60 of them – and they did so without taking a single casualty.

Quickly, the American army learned to fear “the Desert Fox,” as they called General Rommel, repeatedly retreating in battles in order to cut their losses.

How knowledge (study and strategy) changed everything

Here is why this story is relevant for our purpose here. In early March 1943 General George Patton took over the command of the US forces which had grown weary of sustaining heavy losses against Rommel’s troops. Patton had done his homework and read General Rommel’s book on infantry tactics. Patton not only studied Rommel’s thinking and military tactics … he also understood Rommel as a man. In the second battle of Kasserine pass on 23 March 1943, the American troops – now emboldened by General Patton’s confident leadership – stood their ground and refused to retreat. In spite of huge losses on both sides, the Americans eventually prevailed and finally destroyed the myth of invincibility of the German Afrika Corps.

In turning the tide against Rommel’s forces, General Patton famously exclaimed, “Rommel, you magnificent bastard, I read your book!” Thus, Patton’s homework – his effort to study and understand his enemy may have been the decisive factor that changed the outcome in an important World War II battleground. At a deeper analysis, the most important effect of this understanding was precisely the bolstering of the troops’ confidence that Patton brought to the American side. However, this effect is a big subject and for now we’ll leave this important question for another discussion.

Take a strategic, disciplined, long-term approach!

As in warfare, so in investment trading, the work of acquiring and building up knowledge and wisdom should help individual traders avoid the many pitfalls of short-term thinking so they can be more successful with their investing. The prize is worth the endeavor: growing their wealth steadily over time with less stress and greater quality of life.

Alex Krainer – @NakedHedgie has worked as a market analyst, researcher, trader and hedge fund manager for over 25 years. He is the creator of I-System Trend Following, publisher of TrendCompass reports and contributing editor at ZeroHedge based in Monaco. His views and opinions are not always for polite society but they are always expressed in sincere pursuit of true knowledge and clear understanding of stuff that matters.


Alex Krainer’s Trend Following Bible” (2021)

Grand Deception: The Browder Hoax” (2017) twice banned on Amazon by orders of swamp creatures from the U.S. Department of State.

Mastering Uncertainty in Commodities Trading” (2016) was rated #1 book on commodities for investors and traders by FinancialExpert.co.uk





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