Educate Yourself - Reduce Your Risk

June 30, 2009
Mike Doran

“Risk comes from not knowing what you are doing” says financier Warren Buffet. So in these unsure economic times, just what can you do to gain some understanding of the stock market’s foibles? What can you do to protect your investments? The answer is education. Richard Wyckoff, an American investor who pioneered methods of technical stock analysis, once said, “Become one of the successful few who build stone upon stone until they have a solid foundation of knowledge and experience which will last them all their lives.”

Learning about stocks and bonds is complex, but certainly the rudiments are within your reach. After all, getting through medical school and an internship was not a breeze! Learning the basics about the stock market and your investments will bring you some peace of mind. As you gain more knowledge, you will feel more secure when you tackle stock reports on the internet or pick up the Wall Street Journal.

Keeping up with the daily fluctuations of the market and the inter-related global economy can become quite complex and understanding is not gained overnight. Do this in small increments and do not set your expectations too high — or expect quick results. After all, you don’t prescribe 10 days of antibiotics to be taken all at once. Research one area that intrigues or puzzles you and do it one dose at a time. Test your knowledge of the facts to see if you really understand. Then move on and explore more in depth. For instance, a topic that’s in the financial news a great deal now concerns ‘short selling’. Learn what you can about the process and the theory behind it. Evaluate its impact on the market and your portfolio. Talk to your broker, if you have one, and learn more about this method.

There are no infallible methods of stock selection but there are quite a few different analytical techniques. If you are hoping to learn ways of unlocking secrets of instant wealth — forget it! This does not mean that you won’t eventually increase your wealth through the stock market but your first goal should be to increase your knowledge and understanding.

Where Do You Start?

• If you own stocks or bonds, learn more about each.

• Do your homework and complete your own research.

• Talk to your broker about your findings.

• Ask your broker what methods of stock analysis he has found most helpful.

• Increase your understanding of graphs and charts of stock activity and market movement.

• As you learn more, evaluate your own portfolio and whether it is appropriate for you at this period in your life.

There is no one way to pick stocks, but as you learn more about different methodologies, you’ll find yourself gravitating toward the techniques that make the most sense to you. You may decide that a combination of different methods will work best for you. Jack Canfield, author of Chicken Soup for the Soul and America’s #1 success coach said,

“As you begin to take action toward the fulfillment of your goals and dreams, you must realize that not every action will be perfect. Not every action will produce the desired result. Not every action will work. Making mistakes, getting it almost right, and experimenting to see what happens are all part of the process of getting it right.”

Michael Doran is Managing Director of the long/short equity fund, Emerald Bay Partners LP. Mr. Doran can be reached at (530) 677-1635 or info@sierrainvestor.com.