Listen to Cody on Risk Control

Cody has an point that everyone should listen to in his post, Cody on Your World with Neil Cavuto.  I still regard myself as a moderate bull here, but it is altogether wise to take something off the table here.  My methods have me forever leaning against the wind.  As an example, near the close yesterday I trimmed some Anadarko Petroleum as a rebalancing trade.  I still like Anadarko, but at a higher valuation, it pays to take something off the table.  Why?  Because we don’t know the future, and something could happen out of the blue that transforms the risk profile of the market in an instant.

So, what does this mean for me?  I’m up to 12% cash in my broad market portfolio, which is higher than the 5-10% that I like it to be, but not up to the 20% (or down to zero) where I have to take action.  My balanced mandates are taking on cash to a lesser extent.  A 5.25% yield is pretty nice.

Now, here’s where I am different (not better, but different) than Cody.  Cody advocated taking 20% off the table (in his Fox interview), whereas I am forever taking little bits off the table as the market runs.  My robotic incrementalism takes the emotion out of the selling and buying processes.  That said, I may leave something on the table versus someone making bigger macro adjustments.

Whatever you do, it has to be comfortable for you in order to be effective.  The market may go up further from here; on average, I expect it will do so, but I can imagine scenarios where it will not do so.  That’s why I take a little off the table each time my stocks hit upper rebalance points; my baseline scenario may not happen, and rebalancing to target weights protects against what is unexpected.  It is a modest strategy that guards against overconfidence, and will always allow you to stay in the game, no matter how bad the market gets.

I don’t have to be a raving bull or raving bear.  I just have to control my risks, and over the long run, I will do pretty well.  Cody will do well too; he just does it differently.

Full Disclosure: long APC