The question that makes up the title of this blog post is a curious one, as "failure" can be deemed either an objective or subjective phrasing, depending on who you ask.
"Failure," by any standard definition, would point to a situation in which an investor is operating at a negative cash flow. However, given the fast-paced credit environment that many investors experience, simple insolvency wouldn't do it justice, as day-to-day activities can toe this line carefully, if not always successfully. A more correct definition would imply that the investor has "gone bust" and is no longer capable of carrying on as they previously were.
How can this happen? The causes of failure are varied, but most tend to point to a single flaw: The inability to accurately gauge the market's next move. Investing giants such as Warren Buffett exemplify this skill, but it's not something that you learn overnight. Only by carefully evaluating all available data, and comparing it with past trends and future projections – with a little bit of risk-taking and luck – can investors hope to stay ahead of a market. Especially these days, when market shifts are more turbulent than ever, investors can avoid failure by arming themselves with relevant knowledge.
Yet that doesn't seem to be the whole story. Another cause of failure appears to be an oversupply of confidence in one's own numbers and calculations. Look at what happened to MF Global and its one-time rising star, Jon Corzine. Overenthusiastic about the potential payoff of investing in subprime European government bonds, Corzine and his crew dove into a market that they didn't fully understand. When market dynamics – and senior European officials – moved in an unpredicted direction, MF Global was quickly swallowed by its own bets.
The point is that investors need to be aware of their own mortality. Failure isn't black and white, but rather a series of grays that can accumulate far faster than is usually anticipated. Investors should consider using investment risk management tools that peer through the noise and find the informational nuggets that lead to success. Explore our website further or contact us directly to ask about how SmartStops can help you succeed in today's volatile markets.
Categories: Risk Management, Trading & Portfolio Strategies