One of the most important lessons that a successful stock investor needs to learn is that there are times when the market presents plentiful low-risk opportunities and there are times when making money in the markets is quite difficult and far less certain. Adjusting one’s strategy for different market environments is key. You can trade aggressively in a terrific market environment and make triple digit annual gains with easy. But trading just as aggressively in a very difficult market environment could result in huge drowdown of capital. Remember that a 50% drowdown erases 100% gain just to get back.
Over the years one of the most common stories I have seen is for smart investor to begin investing very aggressively during stock market run-up, when the opportunities are plentiful. The smart investor will have a strategy that exploits the good environment quite well – an he’ll typically make huge gains of about 500%-1000% of his money in one to three-year period. But when the market environment changes, this investor refuses to change with it and in the following one to two-year period, the investor losses most or all of his trading capital. Foxhound Funds levereged 300% gain in 1999, but a total of 100% loss of everything by April 2000.
Clearly learning to understand when one can be aggressive, and to understand when to be defensive is important to investors, desiring to maximize gains wit minimum risk.