For anyone who is an American football fan (nod to the ‘other"‘ football, ie soccer) you have likely heard the saying that defense wins championships. And it has proven mostly true. Even teams with what are commonly thought to have great offenses (eg any Tom Brady team) the defense has been pretty good when they’ve won.
When I think of all offense, I think of “Air Coryell” the passing heavy offense of the 1970s San Diego Chargers and their coach Don Coryell whom some consider The Godfather of the west coast offense popularized by the SF 49ers. Despite all of their success (4 division titles), they did not win a Super Bowl. Defense is important. And on the other side, we have an extreme example of defense winning Superbowls with mediocre offenses - The Chicago Bears 1986 team (vs the Patriots) and the NY Giants with Eli Manning, twice (also against the Patriots - ouch) . Not sure how manning got MVP in a low scoring game - it should’ve gone to the Giants defense for stopping Tom Brady and Randy Moss’ touchdown machine.
Same in Investing
I think this is a good analogy in investing. All of the great investors and traders have good defense. Fundamental investors like Warren Buffet and his acolytes focus on having a “caring of safety” when they invest - that simply means in their opinion, the company is worth a good chunk more than the price they paid based on their deep analysis. And depending on the company, that margin could be (again in their opinion) 25-40% or more.
Traders use stop losses so that if a trade goes against them, they sell at a small loss and reanalyze. Their methodology is that if they keep losses small and follow a good plan, their winners will outpace their losers even with a less than 50% success rate per trade.
Same in Financial Planning
In planning, playing good defense includes the basics such as sufficient liability insurance, estimating taxes fairly well and using proper legal documents in the proper places - such as an LLC to separate a business venture from your personal finances.
2022 and Beyond is the Era of Defense
I believe that going forward good defense will trump good offense. What does that mean? It means that in the extreme, when I run across a retired client with 20% of the retirement funds in bitcoin, and big chunks in other aggressive investments, with no diversification for rate hikes, inflation or earnings declines/valuation contractions, I get worried. More interestingly, depending how things go, I may have a problem I have not had in 15-20 years - and that problem is how to manage income and taxes in an active bond portfolio.
Many of my clients are excellent savers and can accomplish their long term goals with a long term target rate of 7%. You can bet big that if I can get clients 7% in government bonds, I will advise a significant shift in that direction. I cover the bond market ‘problem’ in another ARTICLE.
Bottom line, whether it’s grabbing bonds and locking them in when rates are attractive, or moderating investing expectations by using strategies that earn respectable returns without a history of large drawdowns and diversifying for changes in interest rates, currencies, recession etc, having a good offense is fine and can win some divisions (ie win some decades), but having a good defense seals the championship and wins the lifetime game.
Thanks for reading!
This article reflects my opinion and my best thinking. It is not gospel but it’s what I am doing.