There’s no shortage of websites out there ready to throw company names out telling you what to invest your money in. But who are these people? Most websites I see with investment advice display no credibility, no credentials - and that makes me consider their investment advice. The internet is filled with many people from all walks of life and there is nothing stopping anyone from posting whatever they want. I see many posts on pfblogs.org from bloggers telling me what stocks to watch the next day but I never read them. I see blog posts telling me what I should invest my money in for the short term, the long term and everything in between. I still ask myself who they are and why I should listen to them for stock advice.
The trouble is, I’ve seen many people lose a lot of money investing in stocks that their friends (or even family) told them about. A former co worker of mine lost over $10,000 when his father suggested that he invest in a certain financial company. My grandmother lost thousands in the early 2001 when the stock my father praised went from $120 a share to less than $3 in a matter of day’s. The point is, people don’t think and they follow a herd-like mentality.
A classic example of this can be found in the book The Richest Man in Babylon. Here the author outlines a story of a man who took the money that he saved and invested it with a man who went to a foreign land to purchase jewels. The man that he invested his money with had no experience with jewels, he was a craftsman of sorts. The man soon realized his error when he discovered that the jewels were nothing more than shined pieces of glass, which were worth nothing. Moral of the story: Never invest your money in a business that you are unfamiliar with, or never entrust your money with a person to invest for you who is unqualified to do so.
Another great piece of wisdom from “The Richest Man in Babylon” is: “Better a little caution than a great regret.” Investing money and growing wealth is not about having someone tell you what to put your money in. It is possible that many of the people who are telling you what stocks to buy may not have a very large portfolio or success rate for themselves.
Don’t get me wrong, there are many people who have been successful with their personal investments and have become financial advisers. However, the majority of people out there are giving out advice without having much to back it up with. This was very well put by the author of a book that I recently read (title has evaded me). He stated that “There are many speculative investors willing to give me advice and flaunt their latest gain. They are however, never willing to discuss their astonishing losses that occur far more often than these amazing gains.”
It should also be noted that “technical” analysis of stocks (monitoring stock charts and predicting movements in the market) is much different from the outright posts and articles saying “You should invest in this.” The rationale behind this is simple: Not everyone has the same goals or investment requirements. What works for one person may not work for you.
In his book“Rule #1″, Phil Town writes about the fundamentals of picking stocks. The advice that sticks with me the most was that an investor should “know the business.” This does not necessarily limit you to understanding the business in it’s entirety or that you would have to working in the industry. Rather, this concept requires an awareness of the industry - more so than just watching CNBC.
You may be thinking to yourself “Well, I know my industry but nothing beyond it…” But think beyond that. Think about what your children buy and what companies make those products. Where does your family go out on the weekends, what amusement parks do you frequent? The concept of knowing the business is about being on the front line; being an active consumer of the products that company makes. When you look at everything from the perspective of a business (not that of a consumer) you will realize a lot of things that you neglected to see before. If the product of the company begins to deteriorate, you will notice. And from there you can take a look at the company on more than a basic level and be able to make a better decision of whether it is still a good investment.
Personal Reflection
The concept of this article began as a rant which branched from a recent post that I saw on another blog. After many revisions, I have toned it down. I’m still unsure if my point got across. The bottom line is: I want people to realize that they should never blindly, (or wildly) go into an investment simply because someone tells you what you should invest in. Don’t be emotional about your investments - be logical!
First and foremost ask yourself “What are this persons qualifications?” Then ask yourself “Do I know anything about this investment or company?” If your gut says no, it’s usually a bad idea. And if something sounds too good to be true, it usually is. So listen to the logical voice in your head.
It also never hurts to broaden your horizon and work on getting an education in investing. Picking up a book and trying to learn how to invest is no easy feat. But it would be well worth it. Learning the stock market and how to perform analysis on stocks will take some time, but there are a ton of books out there about it. I highly recommend reading “The Intelligent Investor” and “Security Analysis” both by Benjamin Graham - who happens to be on of Warren Buffet’s teachers, so you know they’re good! Plus, those texts are considered the bibles of investing on Wall Street. All in all, be careful in your investing and never purchase a stock because someone (or some website) tells you to. Do your own research and double check everyone elses!
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It’s quite true that we’re all eager to brag about our stellar picks, but rarely do we like to discuss all the dogs in our portfolios.
I think there’s a tendency to want to listen to the advice of our friends and family on “the next big thing” for fear of being left out. Nobody wants to get a great tip and be the only person not to buy into it, only to watch your friends earn huge returns and retire to some tropical paradise while you’re stuck living the life of Dilbert. It’s probably the worst possible reason to buy a stock, but quite common nonetheless.
Everyone is looking for that next great investment, something that will help bulk up your savings or help get to that big purchase you want. There is a lot of advice out there both credible and not. And sometimes credible authors can have bad advice and vice versa. The bottom line is you have to be responsible enough to do your own prior research for any big investment, purchase, etc and make sure you know the terms and what you are getting into.
Craig
http://www.budgetpulse.com
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