Running a football team is no different than running any other kind of organization - any army, a political party or a business. The principles are the same. The object is to win - to beat the other guy. Maybe that sounds hard or cruel. I don't think it is.
- Vince Lombardi
Let's say you're a football coach and a sideline reporter comes over and asks you, "Coach Lombardi, what you are going to run on your first play?"
What is your answer? More importantly, aren't there a few too many variables unanswered by the initial question? First of all, we don't know if we are on offense or defense, and we don't know where will have the ball and what our field position will be. We know it will be first and something, but we don't know what. There are too many unknowns; the same is true with operating in this market without a plan of attack for managing risk.
Within the risk management style you may employ, all the information you review should go into the decision in selecting which play to run just as the aforementioned attributes would go into Coach Lombardi's selection of which play to run.
You must know whether to play offense or defense, and you must know the field position you are playing it from. A properly time-tested risk management strategy should be able to answers these questions. If not, you should most definitely look for a tactic that does. For me, I employ the Point & Figure charting methodology. Not only does it tell me when to run offensive plays (try to make money) or defensive plays (protect capital), it tells me how good the field position is (risk).
Once you've determined if we are on offense or defense we must look to run the appropriate plays. If you believe you are on offense, ideally you wish to stick with stocks with favorable attributes in favored sectors. Using Point & Figure charting, as for favored status that is essentially telling me the quality of players I have on the field. A favored sector is equivalent to a proven veteran, it has shown good strength and if we are on offense, those are the players we want to use. Again, I look at what all of the indicators are suggesting because they all play a role in my decision making process. The Point & Figure Bullish Percents give me an idea of risk, and the 'favored' status gives me an idea of relative strength. If I see we are on defense, most certainly I do not want my weakest players in the game, as they most certainly will be bowled over by the market, which is, no doubt, a formidable opponent.
Lastly, once I've determined my stance and I am in the midst of drafting the best players to serve the team (the investment portfolio), I must also know the field position. We may be on offense and it may seem everything is all in our favor, but if the field position is poor, we don't simply drop back to throw a 'hail Mary' pass. This might be a high reward play, but most certainly a very low percentage and high risk tactic.
As you can see, investing is actually very much like coaching a football team. You must have a strong game plan and a clear understanding of how to navigate through the various circumstances that may be thrown at you. As you might be painfully aware now (after 2000 to 2002 market), you cannot simply put your offensive team on the field and pray that they are strong enough to withstand a formidable opponent- the market, the entire game. And if you have an injured player, you most certainly cannot consider leave him in the game, especially if he might cost you dearly in the end.
"I believe in God, and I believe in human decency. But I firmly believe that any man's finest hour - his greatest fulfillment to all he holds dear - is that moment when he has to work his heart out in a good cause and he's exhausted on the field of battle - victorious." - Vince Lombardi