Island Investing: Reducing Risk

This week’s column for the Keys Weekly.

Island Investing
Cale Smith
June 13, 2009

I received three questions from readers of last week’s column. I’m happy to say two of them were from people other than my mom.

Don’t forget: free T-shirt. Send your investing question to csmith (at) islainvest.com. If nothing else, you can sell it on eBay for $8.

I may alter the names of people who submit questions, either because they asked me to or because it was really a question I emailed to myself. Any resemblance to persons real or fictional is either coincidental or mildly amusing. Here’s the first question.

How can I reduce my risk when investing? From Evel Knievel in Key Largo.

Here are a few rules of thumb:

1. Do not attempt to jump Snake River Canyon in a rocket-cycle. This has nothing to do with investing, but it’s a good general policy.

2. Avoid margin, futures, options, and penny stocks. If you want to speculate, buy shares in gaming stocks, then go to Vegas. Then at least you’ll own shares in the companies taking your money. If you want to successfully invest, stay away from each of these.

3. Think long-term. The longer your investing horizon, the more likely the stock market is to rise. Real investors are committed silent partners of the businesses they own shares in and hang on for years.

4. Limit your downside. Companies disclose the risks they face in their financial statements. Read up on these. Consider a company’s valuation before buying shares, too. All things being equal, undervalued companies are less risky.

5. Get smarter. If you don’t know how to read financial statements, you shouldn’t be picking individual stocks yourself. As a wise man once said, “Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”

To start becoming a better investor, read everything you can. Here are three books I’d recommend: The Little Book That Beats the Market, The Intelligent Investor, and One Up on Wall Street. The Motley Fool (www.fool.com) and Morningstar (www.morningstar.com) are great resources, too.

Cale Smith is the portfolio manager for the Tarpon Folio and Gecko Folio. His firm’s website is www.islainvest.com and his blog is www.caleinthekeys.com.

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Cale Smith

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Portfolio Manager at Islamorada Investment Management.

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