With the Dow soaring to record highs you have to wonder what you can trust in the stock market. Are gains in the market just an expression of Fed easy money policies, or should you jump in for a quick buck?
Unless you’re a trading whiz who can sit in front of your computer terminal all day timing the ups and downs of the market, one of the most important factors for you in any investment you make is recognizing risk. Risk is possibly the most overlooked—and surely the most important—component of investing.
When talking to a friend recently, he asked about a couple hot stock tips he had heard that day. If he didn’t jump in quickly, he was told he would miss the boat. One of the stocks was from an experimental pharmaceutical company and the other a small cap tech startup. This friend enjoys gambling, so we told him that if he wanted to risk vast sums of money at ridiculous odds, he would have better luck at the roulette table. He paused, thought about it, and decided he wanted to hear more about stocks with lower risk. It was a good decision.
When you invest in experimental ideas or technological breakthroughs you have the possibility of amazing success. But if you miss, which most do, the losses can be devastating. The barriers to entry for many tech startups are virtually non-existent. And while experimental pharmaceuticals often promise the world, your odds of getting stuck with a loser are much greater than your odds of picking the next big winner. Instead of buying tech startups and risky bio-tech companies, we recommend you invest in companies that have staying power; companies that won’t be shut down at the whim of a regulator or beaten in the market by a kid wearing a hooded sweatshirt. Companies in industries with high barriers to entry and strong branding power have less downside risk when compared to the stocks described above.