Risk comes from not knowing what you are doing
– Warren Buffett
What a gem! Most beginner investors and some of the seasoned ones consider “Risk” as a synonym to investing in stocks. They should read this Warren Buffet quote every day. The only way to minimize risk is to set clear boundaries about what you know and staying inside that boundary. Buffet would be the first to admit that he doesn’t know lot of things and the second wealthiest man in God’s green earth is not ashamed to admit that.
To expand on this quote, it would be wise to explain a term that he has coined (definitely popularized it. ) which he calls “Circle of confidence”. The circle denotes what he knows and he doesn’t really worry about what lies outside the circle. Many of the other rookie investors also “think” that they have a circle of confidence in which they play. But what sets apart Warren Buffett from your average investor is that how clearly Buffett defined the boundary of his circle of confidence in his mind. For others it is more like a fuzzy line.
The moment you step out of your circle of confidence, i.e, what you know, it is no longer an investment. You are trying to predict the market which makes your investment a gamble or a bet. According to Buffett, his success can be attributed to evaluating businesses to identify a top class business. He also says that he can see how the company will look like 10 years down the line because he evaluated the aspects of the business staying inside his circle of confidence.
In short, educate yourself and make your circle of confidence stronger each day. Stay inside this fortress that you have build when making decisions and your error rate will significantly decrease.