With all the hullabaloo about speculation, an amateur in­vestor may naturally assume that Wall Street is strictly for gamblers. This is a great pity, because probably a long-term investor can get better results in the stock market than else­where, provided he follows a few fairly simple stock tips. Also, it would help in the public understanding of how free enter­prise, and especially big business, is owned, if more of our non-gambling citizens participated in owning corporate stock.

Before looking at the more general stock tips, let us compare stockholders with motor-vehicle drivers. Every year automobiles, trucks, and their drivers cause a fan­tastic number of deaths and personal injuries, not to mention property damage. The great majority of drivers are careful at least nearly all of the time! Most accidents are caused by a comparatively small number of careless and reckless drivers.

A cautious citizen, knowing that he or his family may be the victims of the next accident, could conceivably protect himself by refusing to use motor highways. But the trouble is that motor vehicles save us so much time and energy, and give us so much pleasure when used sanely, that we know their good qualities far outweigh the bad. So we continue to drive, and to hope that the wild drivers will behave, while in our vicinity!

In Wall Street, the speculators, in spite of the commotion they raise, are only a small minority, the same as the reckless drivers on the highways. And in contrast to the highway prob­lem, a cautious amateur can invest in such a manner that he runs no risk of having his finances wrecked by gamblers.

Traditionally, being an equity owner of business involves serious risk, sometimes complete failure. An investor, know­ing the instances of bad results in small business ventures, may assume that in buying corporate stock he must expect to run somewhat comparable risks, and so he makes no attempt to learn how to reduce the danger. Apparently a great many shareholders have attitudes more or less like this. They may not want to gamble, but they don't bother even to inquire whether it can be avoided.

An amateur, wanting to avoid gambling in stock, must do some studying. The main ideas for reducing the risks are men­tioned below, and will be taken up in more detail in several later chapters:

1. Avoid Egotism. For this first of stock tips, realizing that there are several million stockholders in this country, admit to yourself that probably quite a lot of these people are just as smart as you are. Be satisfied with results a little better than average.



2. Avoid prophets, especially the positive ones. The stock market reflects events and rumors from all over the world, and no man or any group of men can be sure of what is going to happen, or when.



3. Don't borrow on stock; the price might drop and wipe you out.



4. Diversify. For this fourth of stock tips, don't put all of your capital into one in­vestment, or into just one type. Put part of your savings into common stock, the other part into fixed-price items cashable at any time without loss of dollar value. Own stock in a good many corporations. The larger the number, the better the chance of getting average results. And for real diversification, the companies should be in several different industries. For instance, pick a steel manufacturer, an oil refiner, an electric-power company, an electronics manufacturer, a railroad, a department-store chain, and so on.



5. Check its marketability. Before you buy, make sure that you can sell or redeem it easily and promptly.



6. Choose skilled management. Find out how to pick a manager of proved competence.



7. Adopt rules on timing of your buying and selling stock. The time of action is a major risk in owning stock. After you buy, maybe the price drops; and after you sell, perhaps the price rises. Maintain a standard ratio between the current mar­ket value of your stock and your reserve. Also, buy and sell stock only in small installments, never moving a large portion of your capital within a short time. By spreading installments over many years, you obtain a fair average price per share.



8. Review periodically. Don't put stock away and forget it. At regular intervals, as for example after the close of each year, check back to see how well your stock has performed during the past five or ten years in comparison to other stock you might buy.

A reader's reaction to these ways of reducing risk may be: "Those are nice ideas, provided a man has considerable capital, but they are impractical with only small savings. A broker's charge is a high percentage on a small transaction; so a little investor cannot afford to make a large number of small purchases and sales. Also, the fee for first-class ad­vice is too high for an ordinary investor to pay."

This reader's complaint is valid, provided he insists on owning stock in the customary old way—that is, being a direct owner of stock in corporations engaged in manufac­turing, mining, transportation, retailing, and so on. But the mutual funds, the open-end type of investment companies, make it quite practical for a man with only small savings to use every one of the ideas listed above for lowering the risk of owning stock. This is the best of stock tips and will be expanded in other chapters.