Expect to Be Wrong in the Stock Market

Editor's note: This is the beginning of a special collection of previously published investing lessons from RealMoney contributor and market strategist Barry Ritholtz .

In the present-day realm of investing, the near obsessive focus on stock selection has obscured the "art" of investing. There is much, much more to buying and selling stocks than mere stock picking. Not that you could tell, based upon what's in the financial media.

This new column -- "The Apprenticed Investor" -- is all about making you a better investor. Not just a better stock picker, but someone who knows how to preserve capital and manage risk.

One of the keys to successful investing is recognizing the frequency of "strikeouts" -- and having a plan in place to deal with them. This is the first lesson most new investors fail to digest.

Apprenticed Investor: Expect to Be Wrong in the Stock Market

I am rather frequently -- and on occasion, quite spectacularly -- wrong. But I expect to be. No one really knows what is going to happen in the future, so why pretend otherwise? When you anticipate being wrong, it makes it that much easier to both plan ahead and manage risk . There's little ego tied up in the position to prevent you from jettisoning it -- provided you have planned for the worst.

For the record, I do not yet consider myself a "master" -- not in the classic sense of the word: In the Middle Ages, anyone who wanted to learn a craft had to first apprentice. After many years of struggle and hard work, apprentices would toil their way up to "journeyman." Once a journeyman demonstrated a degree of expertise, he would be invited to join the guild, thereby becoming a master.

As a member of the guild, the master was expected to pass on his skills to the next generation of apprentices. This was how a craft was kept alive and growing. That's the inspiration for this new weekly feature.

Coming Up Next

Over the next few weeks, we will review the traps, pitfalls and common errors that befall all too many investors. We will disassemble the damaging myths that keep haunting individuals. My list of investing "pet peeves" will get some airtime.

We will dissect the reasons why stocks go up and down; it's actually simpler than most people realize. We will look at the debate over the " fundamental vs. technical analysis " issue. But it's not simply abstract theory: We'll go over "sell signals and stop-losses " -- a very basic yet overlooked tool. We'll look at "long-term" investing -- is it dead? Was it ever really alive? The answer will surprise you.

There are several important concepts that get almost no media coverage -- we will attack those. Managing risk will be a prime focus, including how you can trade even "fiasco" stocks -- like Enron and WorldCom -- yet not get destroyed.

The intriguing issue of investor underperformance will get some ink ( pixels?). I'll show you why human beings simply aren't hardwired for the capital markets. Once you become aware of your limitations as a member of an occasionally rational but often emotional species, it will change your thought process.

We'll also spend time on the "don't" category. I'll discuss the six "investor types" you must avoid. You may be interacting with any one (or more) of these types; they are simply bad for you and for your investing. We'll go over some of the worst things investors say. These excuses lose people money -- and they don't even know it.

I also hope to convince you why you need not own the stock of your favorite company. It's a peeve I call "love the company, hate the stock." (This one freaks people out.)

We'll get to other subjects as they come up. This is an interactive media, so I'm more than willing to tackle your questions.

Finally, many investment "experts" make outrageous promises of untold riches to perspective clients. Here is my more realistic pledge to you: Spend 15 minutes per week with me on these pages, and I promise you that one year from now, you will know much more about how the markets work; you will have developed your own logical set of personal investing strategies; you will have learned disciplines that help you through all types of markets. In sum, you will have that many more arrows in your investment quiver.

And it is my hope that you will have made the transition from apprentice to journeyman investor.

P.S.: For the record, I actually reserved the URL "apprenticeinvestor.com" years before the reality TV show phenomenon.

This column was originally published on April 5, 2005.