Advising Ourselves (Part 3)

What’s wrong with stock tips?

Stock recommendations rarely work out. Part of the reason is because they need to fit into an overall plan. But people who give investment advice (“5 stocks that could double!”) rarely give the nuance and conditions that might make the advice less applicable. What are the risk factors? What is the time horizon? How will the advice get updated? What is the benchmark?

Gurus and pundits usually don’t have much skin in the game. The rules of journalism require that a writer either have no position at stake, or follow significant disclosure documentation. It’s easier for them to write and talk about something they don’t own. But that makes them less interested in what might go wrong, and how things turn out after they make a recommendation.

So when you think about a stock recommendation, the only reasonable way to use the advice is to re-create the analyst’s work, looking for factors the opinionator might have left out—questions that are crucial to how applicable the idea is to your portfolio. But most folks can’t or won’t do that work. They just want to sprinkle some magic pixie dust over their investments.

So, want a tip? Eat your own cooking: study.

Douglas R. Tengdin, CFA

Chief Investment Officer

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