Investment Advice to Beware: No Sales Pitch, But Still Deadly
Sometimes, outlets that may not appear to have any direct sales motive can deliver tilted advice. This type of bias is often hard to detect, unless you train yourself to be alert for it. Yet it can be fatal to your wealth. Here are three carriers of the virus to handle with particular care:
1. The Electronic Media: With the advent first of cable news and now the Internet in its myriad manifestations, it’s easier than ever for shrewd operators to stampede public opinion. Beware TV shows like CNBC’s “Fast Money” and “Mad Money,” which focus almost exclusively on fleeting short-term trends. Ditto for the avalanche of email communiqués that try to rush you into action, with titles like “Pocket $1,000 by Monday” or “Kick Up Your Profits Eight Times in One Quick Move.” For most investors, the way to make serious money is by riding long-term tidal movements, not by playing this morning’s market squiggles.
2. Government: Yes indeedy, your own government is a generous source of slanted investment advice, starting with the self-serving, everything-is-OK pronouncements of Treasury and central bank officials. Federal Reserve Chairman Ben Bernanke seems determined to go down as one of the worst offenders ever in this department. In July 2008, just two months before Fannie Mae and Freddie Mac collapsed, Dr. B told Congress the twins were “adequately capitalized” and “in no danger of failing.” In October 2005, as housing was teetering on the brink, Bernanke proclaimed, “There is no housing bubble to burst.”
Bernanke has admitted that one goal of his “quantitative easing” program was to push up the stock market. Beware! The prices on your screen include a sizable element of Fed fluff.
3. Bloviating Billionaires: Before the Sokol scandal blew up, cyberspace was crackling over Warren Buffett’s negative comments about bonds. Sure, we all know Buffett is a genius at investing in stocks. But has anybody bothered to ask why that talent necessarily makes him an expert on bonds?
Fact is, Buffett has never liked bonds (even though government bonds have logged almost the same return as stocks for the past 30 years). Billionaires don’t need bonds. Even if Buffett’s stocks dropped 99%, he would still be rich beyond the dreams of avarice. Not so most of us. For ordinary mortals, bonds play an important role in generating income and stabilizing our portfolios. Don’t let a billionaire’s prejudice blind you to the importance of a balanced investment strategy.
Investment Advice to Beware: It’s All in Your Head
A final species of investment advice bias may seem perfectly innocent. However, it can also hinder your returns if you’re not careful. I’m talking about your own psychological bias.
We all carry around preferences and preconceptions in our heads, built on years of experience (as well as a fair amount of genetic hard wiring). I have these biases, and so do you.
When it comes to investing, I’m a skeptic. Because I tend to doubt glowing promises and rosy scenarios, I lean toward assets that produce an immediate income. The same “not so fast, buddy” attitude has helped shape my contrarian viewpoint, too. For me, it’s second nature to gravitate toward investments the crowd may be overlooking.
These habits of mind have served me well as an investor. However, I realize there are many paths up Mt. Fuji, all of them rugged, and this isn’t the only one that leads to the top. So I encourage my Profitable Investing subscribers to tailor my advice to their own taste. You may find that in some areas of your portfolio, you want to be more aggressive — or possibly, even more conservative — than I am. That’s fine by me.
Just make sure you understand your own biases, as I’ve tried to spell out mine here in black and white. If you think of yourself as “more of a growth investor” than fusty old Richard Band, can you live with the sharper fluctuations in your wealth that such a strategy entails?
Many people say they can — until October 2008 rolls around, and the markets seem to be plummeting into a black hole. In the end, you’ve got to know yourself, truly and honestly. Only then can you cope with the sometimes crazy and even destructive biases of the financial noisemakers around you.