Using Investment Advice, Part I

If you have a subscription at RealMoney, you should read these articles:

Using Investment Advice, Part 1
Using Investment Advice, Part 2
Using Investment Advice, Part 3
Tread Warily on Media Stock Tips

I didn’t say it at the time, but I wrote those with Cramer in mind.  This was not that I did not like Cramer, hey, he gave me my start in investment writing, my blog would not exist without that start, but that what he said in the mass media often did not include enough data to allow an investor to manage his/her portfolio.  I will explain why here.  (Note, this is true of many investment gurus, not just Cramer.  Cramer takes more abuse because he is so visible.)

Part one is understanding yourself.  What are you good at? What do you understand?  What do you have time to do?

If your work is demanding, ignore services that require quick responses in order to work.  If you don’t understand bonds or commodities, you probably should avoid advice on those, unless they update you regularly on prior recommendations, and provide a track record on recommendations. When younger people ask me about investing, the first question I ask is how much time they have to put into it.  If they don’t have time for it, I push them toward Vanguard and indexing.  Save time, get a slightly better-than average result.

It is also not wise to follow any sort of instructions on investing that you do not understand.  If you want the wisdom of the investor, ask to have a portfolio that mirrors his — I mean, if you have implicit trust in someone, make sure that your interests are aligned.  After all, that is how it is from my clients, they have copies of my portfolios and get the same results, less fees.

If you follow instructions that you do not understand, it is as if you believe in magic.  You are flying blind, but won’t admit it.

Let’s take a different tack: when you read or hear investment advice, how often do they tell you when to take the opposite action?  I.e., buy here, sell there.  Sell here, buy there.  That is rare.

And this is a reason why I rarely write about individual stocks.  I’m not going to update you, and that is true of most investment writers.  Also, when you get one right, you get one praise.  If you get one wrong, you get fifteen kicks.

Using investment advice boils down to understanding what one is intelligently capable of acting on.  You are responsible for educating yourself so that you are capable of evaluating investment advice.  If you don’t do it, no one else will, and you will only have yourself to blame.

More in part II