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Reducing the Risky Part of Risk

Be sure to do the research before making those investment decisions

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Risk Reduction Through Real Research

After I read a stock write-up in a non-Casey publication, I often forward it Vedran for his input. Vedran Vuk is the lead research and stock analyst for Money Forever and we’re grateful for his ability to consistently pick winning investments for us. I’ve been surprised by the number of times he’s had to explain misinformation that somehow gets published by other organizations.

One recent example happened when I asked him about a company that specializes in animal pharmaceuticals. The author (who appears regularly on TV) went on and on about the company and their superior research and development.

However, Vedran read its annual report, which basically stated that its R&D is less than innovative. Instead, the company simply takes products that have worked on one animal and tries to tailor them to work on others.

So essentially, the company is just tweaking existing drugs for use on different species. That’s an interesting strategy, but it’s certainly not what the big TV personality was promoting. Vedran said to me:

“It happens all the time and the guy touting the stock should know better. The devil is always in the details with these things. What many people don’t understand is that the research behind even big names in the financial press is often very shallow. You can’t comment on fifteen different stocks every day and expect to really know what’s going on in each one. Unfortunately, a lot of people are investing based on this sloppy research.”

Wham! It hit me. That’s why pure research companies are so valuable to individual investors. Vedran and his team thoroughly research every single recommendation in the Money Forever portfolio. We want our subscribers to know as much about a company, its products, and its industry as we do. The same holds true for the other Casey editors I mentioned earlier.

So what is my point? The best way to reduce risk in a risky world is to lean on competent professionals who know what they’re talking about. I think Vedran said it best:

“Dennis, we look at the company, its management, and hundreds of other variables. Most of the companies we investigate never come close to making the grade. Once a company is good enough to be a recommendation, both the researchers and editors (after a required waiting period) are likely investing in the stock along with our subscribers. Our odds of success have to be well tilted in our favor before we will recommend it.”

Rick Rule was right. The best way to minimize risk is to do the hard, challenging research, and then invest only where the odds are well in your favor.

In addition, we have an extra accountability factor. If a TV pundit touts a stock and it goes south, that is one thing. Tomorrow he will tout the next one. But when we add a pick into our portfolio, our subscribers hold us accountable. Also, we are reminded regularly when we check our own portfolios how well our picks are doing.

While I read as much as I can, I pay a lot more attention to a recommendation that is going into the author’s model portfolio as opposed to a cool, one-page article about a company that sounds like it was written by its marketing department.

In the same discussion with Vedran, he was quick to mention that picking a solid company is the first step toward reducing risk in a volatile market. What happens if we have a lot of money tied up in junior mining stocks or technology stocks and the volatile market turns in an ugly direction? Much like the craps player who has multiple bets on the table, we might take a beating if we are too heavily invested in one sector.

For our subscribers who are baby boomers saving for retirement, or for those already retired, we focus quite a bit on sector allocation and conservative investment strategies that give us maximum upside with little downside, like our 20/5 rule so that no more than 1% of our portfolio is at risk.

Retirees can’t afford to get hammered when one sector takes a hit. And even if you’re a few years out, do you really want to risk having to work several more years when your portfolio takes a beating?

Good companies with good products and top-quality management will follow the market, but have a history of recovering quicker than most. Meanwhile, spreading our capital among sectors and limiting our bets gives us an additional hedge against volatility.

Article printed from InvestorPlace Media,

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