In 1998, astute financial author Charles D. Ellis wrote: "Winning the Loser's Game: Timeless Strategies for Successful Investing." Mr. Ellis argued that the stock market had become a "loser's game", where success comes from avoiding mistakes and keeping costs low rather than trying to beat the market each year. The "way to win" shifts from making brilliant moves to avoiding unforced errors. If you prefer a baseball analogy, it's hitting singles and doubles rather than swinging for the fences and striking out. This philosophy has guided our investment strategy since we started investing in 1998.
What are some typical unforced errors we see in investing?
- Selling at the bottom.
After a 30–50% decline, the pain of losses can overwhelm any rational reason to stay invested. The fear is, "It will fall more," or, "Even if it recovers, it will take too long and I'll be gone by then." Selling in those moments is one of the biggest unforced errors we see. For a typical investor, doing it even once can dramatically impact their financial success. - Buying at the top.
If selling at the bottom is driven by fear, buying at the top is driven by greed. We tend to see this after big, fast moves, when a stock is up 100% in a few weeks, or when companies with no earnings and minimal revenue trade as if they've already changed the world. The siren song of more gains is hard to resist, but chasing that kind of price action is one more classic unforced error. - Going to cash over a headline.
Tariffs, elections, war, pandemics, you name it, we've heard all the reasons to "go to cash until things calm down" or "wait to invest until there's more certainty." The specific story doesn't matter; every time someone has done this in the past, markets have eventually moved on to new highs while they sat on the sidelines. That decision to step out entirely has consistently been an unforced error. And newsflash, there's certainly always going to be uncertainty. - Being under-diversified.
This is just a fancy way of saying "too much of one thing." Sometimes that's cash, which steadily loses ground to inflation. Sometimes it's a portfolio of only U.S. tech giants, or only U.S. stocks in general. There are endless ways to be under‑diversified, and they all have one thing in common: higher risk without a reliable increase in return, leading to another unforced error.
The current boom in artificial intelligence is exactly the kind of environment where unforced errors are easiest to make. That's why we want to share what we are seeing and what we've done in portfolios.
Artificial Intelligence
AI will change the world and have a powerful, real economic impact. You can't really argue otherwise. On the other hand, because AI will be so impactful, it is almost inevitable that it will lead to a bubble. We discussed this idea extensively in our September 2025 WJNotes, "Portfolio Resilience: Embracing Uncertainty." We requote Mr. Grantham:
"The bigger the new idea, the bigger the new invention, the more the market becomes overpriced, the more it attracts euphoria. It's not accidental. Really great things happen in the internet phase, '98-'99. But they overdo it. . . When you have these great developments, they overdo themselves in the short term, they crash in the intermediate term, and then they come out of the wreckage and change the world in the long term. And that's what I expect will happen this time."
So how do we participate in the upside while protecting ourselves if the current boom tumbles into a bust?
What We Are Doing
To further improve our resiliency, as discussed in our last WJNotes, and to avoid unforced errors, we recently made the following changes to our growth and stable growth portfolios:
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Rebalanced portfolios. The recent strong gains in stocks have left them above our target weight, while bonds are below their target weight. We rebalanced portfolios by selling stock and buying bonds.
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Shifted an additional 1% of portfolios from stocks to bonds.
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Added another diversifying managed futures position. We added a 1.5% position of Return Stacked International Stock and Managed Futures (RSIT) to portfolios to provide additional downside protection.
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Adjusted leverage positions. We are also adjusting our leveraged positions by taking advantage of new levered or return-stacked funds that have recently become available.
In our enhanced growth portfolio, we are also adding Stone Ridge Reinsurance Fund as a diversifier and adjusting some of our leveraged positions.
Bubble or Not, We Have a Plan in Place
If the AI boom continues, we will participate through broad, diversified exposure. We own many of the high-flying AI stocks, but in small positions, and we are positioned to capture gains. And if the AI boom broadens, and the entire market begins to trade on its fortunes, we will also participate. Note that despite the increase in our bond position, most portfolios maintain a full stock weighting through leverage.
If the bubble bursts, our diversification, position sizing, and uncorrelated assets will soften the impact. We will not avoid all losses but hopefully will retain some of the gains. Importantly, this diversification also positions us to rebalance, using more resilient areas of the portfolio to add to those that have declined, allowing us to effectively buy low, sell high, and participate in the recovery.
Our goal is not to predict how the AI story ends; it's to ensure that you are protected regardless of the outcome.
Avoiding Unforced Errors
Markets are excellent at exploiting investors' weaknesses. Underlying fear and greed are amplified by extreme price movements. They are very good at presenting tempting stories and headlines that seem to require action. Our edge is that we can avoid unforced errors by staying diversified, rebalancing when enthusiasm runs high and sticking to our plan rather than succumbing to the latest and greatest story.
If you feel tempted by excitement about or fear of AI, please get in touch with us. Unforced errors often feel like the right decision at the moment. We are here to provide a calm, clear voice in both the boom and the potential storm.
Key Takeaways
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Avoid emotional investing, discipline beats reaction.
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AI offers tremendous opportunity but also increases the risk of a market bubble.
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We've strengthened portfolios through rebalancing and added diversification.
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Our focus remains on protecting your wealth while positioning for long-term growth regardless of how the AI story unfolds.
PAST PERFORMANCE IS NOT A GUARANTEE OF CURRENT OR FUTURE RESULTS. Examples of historical information included in this presentation do not, nor are they intended to, constitute a promise of similar future results. Specific client portfolio allocations, risks and returns can and may deviate from these examples depending on accounts and types of investments available through each account. Future market views by WJ Interests, LLC may vary significantly from the historical examples presented herein and no one receiving this summary should assume that WJ Interests, LLC will be able to replicate successful views in the future.
