newsgathers

Understanding the nature of investment risk is paramount for any market participant, yet its definition often remains elusive. This piece explores various interpretations of risk, particularly highlighting the significance of preventing the permanent erosion of capital. It discusses how professional money managers typically employ quantitative tools such as equity beta and Value at Risk (VaR) to assess and mitigate portfolio dangers. However, recognizing that these sophisticated methods may not be feasible for all, a simplified framework of ten crucial indicators is introduced to help investors gauge the potential culmination of extended bullish market cycles. The current activation of all these indicators suggests a heightened state of market vulnerability, prompting a reevaluation of investment postures.

For sophisticated investors, risk assessment often revolves around metrics like equity beta and Value at Risk. Equity beta quantifies a stock's or portfolio's sensitivity to broader market fluctuations, with a beta of 1 implying movement in tandem with a benchmark such as the S&P 500. A beta greater or less than one indicates higher or lower volatility, respectively. VaR, on the other hand, estimates the maximum potential loss over a specific timeframe at a predetermined confidence level, under the critical assumption of normal market conditions. Both measures, while valuable, inherently reflect past performance, which may not reliably predict future outcomes. The author's fund diligently calculates these metrics daily, adhering to a self-imposed limit of a 3% 1-day VaR at a 97.5% confidence level.

Individual investors, lacking the resources for daily, granular risk analysis, benefit from a more streamlined approach. The article proposes identifying a concise set of historical indicators that have historically preceded significant market downturns. The author utilizes a personal set of ten such indicators, all of which are presently signaling caution. This confluence of warning signs suggests that the current extended bull market may be nearing its conclusion. However, three important caveats accompany this observation: secular bull markets rarely end without a specific catalyst; the chosen indicators can vary among investors as long as they prove effective; and timing market reversals is exceptionally challenging, often leading to premature exits or staying invested too long due to career risk or herd mentality.

The prevailing speculative fervor in the market is underscored by recent performance data, particularly from the first three quarters of 2025. Nasdaq stocks with no revenue, for instance, delivered the highest returns, followed closely by unprofitable Nasdaq companies. This pattern, coupled with the increasing leverage among hedge funds since 2013, as illustrated by Goldman Sachs data, paints a picture of excessive risk-taking. Such trends indicate a market driven by momentum and crowd psychology, echoing past speculative bubbles in Tokyo (1990) and New York (2000). The author warns that this environment is unsustainable and could lead to significant corrections.

Despite the current climate of overvaluation and speculative exuberance, the author's fund maintains a near-fully invested, yet defensively positioned, portfolio. This strategy includes significant allocations to low-beta equities and commodities, which typically perform well during equity market declines, along with a substantial holding in gold. This defensive stance unexpectedly yielded an exceptional 29.24% net return for USD investors in 2025. This outcome has prompted the fund to critically examine whether such high returns inadvertently indicate a higher risk exposure than intended, reinforcing the continuous need for rigorous risk management and scrutiny.