Separating Information from Advice is Critical Component of Successful Investing
By Anthony Rhodes
I frequently receive phone calls or emails from investors regarding something that they heard on television about one of their stock positions. The correspondences usually include either speculative assumptions about a new product, or a new managerial hiring or firing, but usually conclude with a form of action being considered in response to this new found data. “Was it information or advice?” I ask. “What?” is the typical response. “Information or advice,” I follow. “Did you receive information or advice?” Now this line of questioning is certainly not meant to demean the recipient, but is instead a filtering technique I use to help investors to arrive at a point of focus and perspective. In other words, understanding how to distinguish information from advice is a very important aspect of successful investing. And conversely, failure to differentiate the two can be equally as harmful. For this reason, we’re going to take a good look at these two items in an attempt to gain clarity on the issue, and to help you to discern whether their use or misuse is having an effect on your portfolios’ performance.
Imitation is Suicide
When watching any one of the daily investment shows, I find it easy to understand how this topic can cause confusion for some investors. One expert says he’s buying this stock right now, and another says she’s increasing her position in that stock for the time being. It seems only a natural inclination to mimic what the professional is doing with one’s own portfolio. But are the experts providing you with information or advice? Let’s examine this a little closer. First of all, it’s important to remember that no prudent investment professional will ever advise you on what stock to buy without understanding your unique financial situation. Nor should you as an investor, ever purchase a security from said individual without disclosing such data. Using this as your guideline, it becomes apparent that such communications are clearly information based, and is in fact, not advice (and should be treated as such). While the temptation to profit from the opinion of a professional is an alluring concept, it’s better to do so from one who knows firsthand that if he or she is wrong, what immediate ramifications such an opinion will have on the state of your finances. This truth insures that the advice given is appropriate for your individual tolerances for risk, and that the securities offered or proposed have been met with the scrutiny deserving of that recommendation.
Second Hand Smoke
For some reason, many investors fall into the trap of acting on the investment information obtained (directly or indirectly) from a friend or colleague. The enticement of a potential “hot stock” or “can’t miss proposition” is very attractive, especially if coming from a source of respect or seniority. Here again, one should ask, ‘Am I receiving information or advice’ on this issue. Keep this in consideration: no two investors are identical, and similar incomes do not equate to similar financial circumstances. Just because you work with an individual or live in the same neighborhood as someone, does not mean that you share his or her investment objectives. This is very important to remember when deciding how to act upon a “friend’s referral”. A potential ‘hot stock’ in one persons’ portfolio; while perfectly appropriate given their investment profile, could be far too risky to reside in another’s. Limiting your receipt of advice to your investment professional will go a long way towards insuring that your portfolio includes only the stocks, which are appropriate for you, and will also help your friends to remain in good stead.
Well, there you have it. The great mystery surrounding information and advice uncovered for all to see. I hope the content of this article provides some assistance to those of you who may have been grappling with this issue (either consciously or subconsciously), and to those whom I have corresponded with, am equally hopeful to have articulated the supporting foundation that my conversations and emails may have failed to deliver.
Food for thought: In the world of investing, information and advice represent the two opposite sides of the same coin; with no one side having more importance than the other. Let’s keep this in mind as we continue down the road to financial success. And remember, it is only when we use the two together that we increase our chances of converting that coin into dollars.
(Anthony Rhodes is a Registered Investment Advisor and owner of wealth management firm The Planning Perspective www.theplanningperspective.com )