We're going to start off and have a look at what a retail investment portfolio looks like over a one year over a 12 month period. So as you can see, there's a number of things that's wrong with an awful lot of retail investors portfolios right here. One of them is they're not diversified enough. Second thing is they're not doing their background due diligence. They don't have a top down worldview. They're not sure about the bottom of economic appraisal, and therefore they don't know what sectors to buy, for argument's sake, because you have a small concentration of stocks and you're not sure what you're buying.

There's massive swings in the portfolio, right? So it goes from negative to massive in a short period of time to back down, giving most of your profit away, back up again to decent profits give most of the way and I'm being very, very generous here and suggesting that this specific retail clients actually makes 11% in reality, it's probably closer to zero. And so our job as an investor is to smooth out the curve, smooth out the returns profile of this. And we can do that in a number of ways. As we mentioned a moment ago and throughout the course, is what we teach is figuring out some sort of probability of of what to buy, right? So we start off with a worldview, very simply, are we in an expansion or contraction economic cycle?

If we're in an expansion, what should we be buying? And if we're in a contraction, what should we be selling. So the idea would be is to figure out and identify which sectors we want to buy. And we want to have enough diversification in our portfolio, say 10 to 20 positions, depending on the size of your account. And what that'll do is that'll start to smooth out all of these peaks and valleys, if you will. So essentially, we're trying to smooth out the curve, we're trying to get rid of that valley, that peak, that valley there, that peak and what we want is something a little bit more consistent, that trends like so it's going to be up and down.

And bouncy tried the year, but we wanted to be fairly consistent. The problem would have in a portfolio like this with massive peaks and valleys is you need a hell of a lot of stamina in order to sit tight year after year with massive losses, then massive gains massive losses, it's an emotional whirlwind, what you want is you want to start close to zero, and you want to trend upwards consistently over time. And to give you an example of what we'd be looking for something like this, where our downside is protected. So we're doing our due diligence, we're buying assets that have a high probability of rising in the specific environment that we're in, we're also well diversified, right? So because we're well diversified. One single stock is not going to drag our portfolio performance way down, and then push it way higher when it starts outperform instead, because we have, let's say, 20 positions in our portfolio, or 10 or 12, depending on the size of your account, and we'll go through all of that in the full course.

But depending on the size of your portfolio, you'd be well diversified. through a number of different industries and sectors, and if one or 200 performs, that's fine, you will you may underperform from one month to the next. But it will be mitigated because the other half of your portfolio be outperforming. And it all comes down to risk management, right. So you should be aiming for anywhere from 40 to, let's say, 75% performance. I don't mean percent change.

But I mean, the ideas that you have in your portfolio, the positions that you've taken, you want about 40 to 75% of those to make money. And then you're likely going to have 60 to 25% of those as losers. And the goal is that for every winner, you have you outperform, let's say three to one versus your losers. And by the end of the year, you should be aiming for something close to it by 20%. And if you can do that consistently over a number of years, that's how you get wealthy by investing. So our goal is to smooth out this curve guys as best as possible.

We want to mitigate as much of these draw downs as possible and we want to focus on our winners on the upside. And again, that comes to risk management, and it comes down to doing the background work, what's your worldview, what's your economic appraisal, expansion contraction, what sectors to buy, etc, risk management charting all of the above doesn't take an awful lot of work. But it does require you to do a little bit and over time, it becomes very rewarding. So the idea is to smooth out that curve, and you want it from the bottom left to the top, right, but understand that every month is not going to be a fantastic month, you are going to get draw downs and and some years, you might get bigger draw downs than others. But the idea would be over time that you're you're performing very well. So there are four different types of risks that we take in our portfolio that an awful lot of retail investors don't actually recognize when they're buying a stock or an acid, we'll go through each risk, but essentially what we have at the top here and I have it in green, because it will be the lowest risk, but we'd have market risk at the top.

And then it gets a little bit more severe here with sector risk than industry risk. And the worst type which unfortunately, an awful lot of retail investors fall for is balance sheet risk, right, so we'll go to through each risk, and we'll talk about how to mitigate that risk. And at the very end, we're going to go through an example. Starting off with balance sheet risk, this is the most severe. That's why it's marked off in red. Let me give you guys an example of this.

If you guys remember back maybe some of you do, maybe some of you don't. But there was a company back in the late 1990s, that was on fire. All analysts were expecting growth for this company, this company called Enron, and this company was it was a wall street darling. And all analysts were expecting growth into the future. Now, if you were 100%, long, Enron, you lost all your money because this went to zero based on fraud. There was an awful lot of allegations of fraud.

And I think it was proven to be an awful lot of fraud going on in Enron at the time, and I believe their their CEO just got out of prison in the last year or two after a 15 to 17 year stint. So essentially, if you're buying blind into this 100% of your position at Enron based on what they're saying, and the majority of the time the analysts are close to being right, but every now and again, you risk Finding an Enron and if you've got 100% of your portfolio in there, it goes to zero very quickly. Right? So diversification extremely important, guys. Next one is industry risk. And I'm going to give you guys an example of a situation that happened back in 2017.

So Tyson Foods on Sanderson farm both of these companies here, they operate in the dairy market. And in 2017, there was an issue with bird flu. So these both of these companies have chickens and poultry on Sanderson farm was reported to have issues with bird flu on their farms. And in hindsight, we now know the cure for bird flu was to kill all the poultry. So millions of chickens were killed, and that's an awful lot of assets that just disappear for these companies. Now, while this was happening on Sanderson farm, Tyson Foods didn't have any reported issues with their chickens or their poultry, yet the share price drops.

Why? Because investors were fearful that that's Bird Flu would spread from senescence farm over to Tyson Foods. And unfortunately the market starts to price this lower not because earnings fall not because there's fraud, but because Sanderson farm and picked up some issues with bird flu. And so how do you how do you move forward in an industry when something like that happens where the company is performing fantastic, but investors are selling again, very similar to how we remove balance sheet risk. And that would be true going long and short. Right?

So when we look at balance sheet risk in the above example, diversification is the best way to mitigate that risk. When we look at industry risk along short position is is another way in which we can mitigate that risk, right? So Tyson Foods and Sanderson farm you would go long Tyson food and you were short Sanderson farm, and you'd make the spread in between. And what you would want to do is you'd be looking at the volatility of each company, you'd be maxing it out, so you'd be using either bita to position yourself on this trade or you would Be using average true range. And that will give you a fair position size based on the risk allocated to this position in order to stay in the trade. And if some sort of scandal such as bird flu happened in Sanderson farm, and Tyson Foods starts to fall, that's fine.

Because you're short Sanderson farming you're likely to do very well. So on the short side, on the long side, none environments are protected, right? So it's almost like buying insurance within a bull market. So with industry risk, the best way to protect yourself is going long and short. Now moving on to sector risk. So back in 2015, we had a supply glut for crude oil, right.

So crude oil were over supplied, and not just producers of crude oil, but also non energy minerals fold on the broader sector, right. So the broader energy sector fault, not companies specific to crude oil, so across the board and to give you an example of that would be silica holdings, silica holds Essentially went into a massive boom because they provided sand for the shale boom that was happening down in the southern states in America in and around the Permian Basin etc. So they were essentially providing sand that was their main commodity. And they were still massively hit because the the oversupply in crude oil, the falling share price of crude oil, etc. So sector risk would be across the board, it would be an event like an oversupply in crude oil, and then you're taking on massive risk across the board. Again, the best way to mitigate this risk would be let's say, if I wanted to go long silica holdings, it would be too short the sector, right so not necessarily specific to another company because that could be an awful lot of work.

But we could just short let's say, for argument's sake x le the energy sector, and what that's doing is we'd be buying a higher beta name like silica that's expected to do let's say, I don't know 2030 40% per year, and we'll be shorting x le which would be the energy SPD or energy ETF Let's say that was expected to 20 30%. And you'd make the difference in between. And that's what you'd be looking to do in order to mitigate sector risk. So remember, we're looking to reduce the volatility in our portfolio. And how we do that so far would be for balance sheet risk, we'd be looking to diversify across 10 to 20 positions for industry risk, we want to be long, short intersector. Right.

So industry risk, we want to go long, short, to companies specific in the poultry industry. That was the example that we gave above, not necessarily broadly in food. So if I'm going to go long Sanderson farm or Tyson Foods, I want to know their company to go short in the poultry market, not necessarily food, so we got to be very specific about what we short to mitigate that risk, and then what sector risk, it doesn't matter. It's more about the actual sector going down as a whole. So you'd be going long a company like silica or Halliburton or any of these companies, and you'd be shorting the the broader sector in order to mitigate that risk. And then finally you will have market risk and, and we can look at Lehman Brothers maybe 911, the stock market close for three to four days and then it had a little bit of a crash or protectionist policies, any of these things could affect the broader market.

Now, these are few and far between. But if we were in the strongest point of a bull market, it's always a good idea to have some sort of protection, whether it's long, let's say a specific industry or sector, and you want to short let's say, the s&p 500, the broader market. And what you're mitigating is, as I said a moment ago, potentially protectionist policies from the government, maybe it's a company that's way over leveraged, that affects the broader economy. Or maybe it's an event, a terrorist event, like what we seen in 911, where the Twin Towers came down in the market closes. So that's essentially what you're you're mitigating, you're mitigating that risk, and you'd make the spread in between. So you'd be looking for a company with two two and a half beta versus the s&p 500 up gone long and short and you'd be making a pretty decent Spread in between.

But if any of these did happen, we wake up on Monday morning, markets are down to three, four or 5%, you're protected to some degree. So that's a way of buying insurance. So what we're going to do is we're actually going to look to mitigate balance sheet risk and industry risk. So we're looking at both of these areas in order to mitigate risk. And we're going to do an example right now. So we're going to look at industry risk on balance sheet risk.

So diversification is number one by balance sheet, and then industry risk. It's about long and short intersector. So we're going to have a look at that now.