Every good stock investor that I have ever met has some methodical, well thought out system for risk management that he or she can clearly articulate. Risk management is essential to successful portfolio management because nobody can predict the future. That’s right, for all of the noise and opinions on TV or the internet, for all of the newsletters being sold and all of the stock tips from your best friend’s brother-in-law who used to be a stock broker, nobody can predict the future.
As discouraging as it might sound, I definitely do not mean to imply that you can’t make money in stocks or even that you can’t outperform the market. I just mean that investing is inherently the art of decision making under uncertainty. And when decisions are made under the condition of uncertainty, you better have a plan to handle your positions when you’re wrong - because being right two out of three times is considered successful in the investing business.
At Emerald Asset Management, we don’t believe there is one right answer to the question of how to best manage risk. In fact we use several layers of risk management to help our clients protect, grow and enjoy their hard earned investment capital. In our opinion, the two most important factors for controlling risk in aggressive portfolios are position sizing and stop losses. Furthermore we use stop losses in conjunction with proper position sizing using what is called an Anti - Martingale Strategy. For more conservative portfolios we think that proper diversification, a margin of safety, quality and time along with proper asset allocation can adequately manage risk. At the end of the day, picking stocks is a personal endeavor. So the best place to start the process is by striving to know yourself.