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Investing Specialists

How the Crash Altered My Strategy

StockInvestor editor Paul Larson is keeping a wary eye on black swans, black boxes, and high-leverage companies.

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The past several years have certainly been interesting ones for investors, with numerous remarkable events we are not likely to see repeated anytime soon. After living through the real estate market collapse, the Great Recession, a significant stock market crash, a credit crisis, and a recovery, there have been more than few learning experiences along the way. Here is how these experiences have altered my basic strategy in managing my personal accounts and Morningstar StockInvestor's Tortoise and Hare portfolios.

Handle Leverage With Care
It strikes me that a common theme among previous bubbles and subsequent collapses and panics is the presence of high amounts of leverage. Debt can fuel excess returns while a bubble is inflating, but it comes with a cost. Namely, debt reduces financial flexibility and can exacerbate the damage on the downside. Debt can also cause financial problems to spread. An unlevered institution can make bad decisions that cause it, and only it, to lose all its money. But a levered institution making bad decisions threatens borrower and lender alike.

Paul Larson has a position in the following securities mentioned above: AXP, CX, DFS, JPM, KMX, VMC. Find out about Morningstar’s editorial policies.