My Wife As Risk Manager?

Sometimes I wonder if women will emerge as the greatest investment risk managers in our homes. Some of my friends may argue that this is a little stretch - they know that I am a "womens advocate" nowadays - but after talking with my wife last night, I think the evidence is shifting more and more towards this theory.

By the way, the July 2006 issue of OnWallStreet has an interesting article (written for professionals) about how your investment performance is influenced by your behavior - the way you respond to the market etc. I met a man who told me that at the height of the tech bubble his portfolio was over $1 million dollars. He did not sell a dime. He had no sell discipline. (most people don't). He informed me that his portfolio after the collapse was down to $250,000, but, "it's like I never really had it anyway...", he said. Sure. Idiot.

So typical, I thought. I wonder how much he paid for the shredder. Somehow I am sure this guy no longer wanted to show his wife those monthly statements anymore. And guess what? You'll never have a tech bubble like that again. How did he explain to his wife that he lost $750,000. I imagined this degenerate masturbating online while looking at his account, ignoring the calls from the discount brokers to take money off the table etc. What a freakin' waste.

I manage money for other people, so that means I can't really spend time managing my own money. Therefore, over the past few years, I have been able to give my wife a few investment lessons. The reality of it all is that very few people are going to outperform the market (well some managers will, like Navellier, but somewhere north of 70% of the professional money managers that are out there will underperform their benchmark). When you buy a stock, you pay to get in, and then when you sell, you pay to get out. You are paying commissions. Therefore, in order to even match the benchmark (e.g., S&P 500) you will have to first make up your commissions! Trading costs erode returns.

My goals are not total performance. I want to also manage risk. So last night my wife and I got to talking about a stock that we were following and I commented that the fundamentals didn't look good and the stock had some cyclical risk that I wasn't comfortable with. Then, my wife said, "well, why not buy Puts?"

Oh really?

Gee? Why didn't I think about that? It certainly is an option, no pun intended.

Puts are options contracts that give you a right to sell your stock - one contract is 100 shares of stock - at a fixed price during a period of time before expiration. You pay a premium to the option seller. It is a hedge in case your position deteriorates. Therefore, if I own ABC stock at $5/shr and I own the Put Option guranteeing me a sell price of $4, but the stock is trading at $2, I can still Put (sell) it for $4! The guy who sold me the Put Option will have to buy the stock at $4, even though it may be trading on the market at $2. This is a very general discription. You will want to surf the web or buy a book etc. to get more details on options trading.

My wife whispered this strategy while she was falling asleep. Risk managers dream this stuff.

I think that men can find some value - sometimes - if they just listen once in a while to another opinion. Will I buy the company? I don't know, but at least I know that if I do, my risk manager will be there to help bail us out!