Kayaking Your Way to Wealth

I went kayaking for the first time in my life this month. It was great -- I enjoyed the peacefulness of the ride, the breathtaking scenery, and the chance to get in some painless exercise while socializing with friends. Of course, while my friends were meditating on nature's bounty, I was doing some thinking about financial matters. You see, there are some fiscal lessons we can draw from kayaking.

For starters, just about anyone can do it. I took no kayaking lessons, passed no kayaking test, and had no provisional kayaking license, yet I was still able to climb into a plastic craft and paddle out into a lake or cove. Investing is like that, too. If you have some money and a telephone, or a Web browser, or a nearby brokerage office, you can invest in stocks and funds. That's it. You just need to choose a good brokerage, fund an account, and let the brokerage know what you'd like to buy or sell.

Still, it's useful to get some guidance before you get in the water -- literally and figuratively. During my kayaking trip, one of my friends ended up tipping over and having to swim to shore. Why? Because we hadn't been taught the basics of kayaking -- such as when a powerboat goes by, leaving a wake of waves coming at you, you're better off turning into them to avoid tipping over. My friend learned that the hard way. Of course, learning something the hard way is sometimes the best way to learn it. My friend and I aren't likely to forget how to deal with wakes now, for example.

Get some grounding
In investing, it's also best to go in with some grounding. Know that the stock market has averaged around 10% returns annually over long periods but that anything can happen in the short run. Know that small, young companies, especially those that aren't yet profitable, can be riskier than big, established companies. (They have the power to deliver great results, too, though.) And know how to crunch a few numbers, such as the market capitalization of a company -- which you can figure by multiplying the shares outstanding by the current stock price:

Data: Yahoo! Finance.

Look at how much you can learn just from these simple numbers. You can see that the market values for Amazon and eBay are almost the same, even though Amazon.com's share price is more than three times eBay's, so the total shares outstanding are worth close to the same amount for both companies. Similarly, Toyota's total shareholder value is more than 12 times rival Ford's market cap.

Safety first
Avoiding risk is another lesson to learn. In our boats, we weren't eager to wear life vests. We reasoned that we could swim and didn't plan on ending up in the water. Well, one of us did end up in the water, and although she could swim, she found out the water was very cold and realized that the boat might have whacked her in the head as she fell.

Similarly, in investing, there are ways to safely go about your business. For example, you should diversify your holdings, because owning just a handful of companies or funds puts a lot of weight on each one. If you're spread out into, say, 10 or 15 holdings, you won't get crushed if one tanks.

Prepare for accidents in investing. With stocks, know that the unexpected can happen. A company's product can end up in the news in a bad way and significantly depress the stock temporarily. (Remember the Tylenol tampering incident?) A company can also turn out to have been fabricating its results. (Think Enron.)

Give it over
Finally, with kayaking, if you don't want to be an expert, or you want to enjoy the water without having to do all of the paddling, you can let someone else cart you around. Find a friend with a rowboat, hire a gondola, take a cruise ... you don't have to paddle if you don't want to.

In investing, you can choose to invest in mutual funds run by smart managers. You can get instant diversification with the help of professionals making buy-and-sell decisions.

As for me … well, you can expect to see me out on the water again -- both in my kayak and in the stock market.