Whenever I hear an “expert” in the financial media comment on an individual stock, I always think to myself that there must be an ulterior motive. No one touts their views from an entirely altruistic standpoint. This is why having a healthy dose of skepticism when you hear an investment singled out is likely in your best interest.
This topic came to the forefront this week with the reporting that Tobin Smith, a former Fox News contributor and financial media mainstay, was engaging in unlawful securities activity and was fined by the SEC. You can read the full complaint here.
I’ve never personally interacted with Tobin, although I know he ran a very successful newsletter and was a fixture in investment circles over the last ten years. At the height of his fame, I saw him give a speech at one of the MoneyShow conferences were 500-1,000 investors listened in rapt attention like they were hearing the Pope give a sermon. There was a certain magnetism about the man that drew people in and made them want to believe everything he said would come true.
I’m sure many of his stock picks over the years were quite successful. However, this most recent public disclosure now calls into question the drive behind his recommendations.
Was he acting in your best interest or his?
Many will ultimately condemn the entire financial media industry as being on the take as a result of this disclosure. I think that is an extreme view. The majority of people on TV or radio are hard-working individuals who are trying to entertain, stand out in some way, or build a professional rapport. They get caught up in the cycle of fear and greed just like the rest of us. Most will also have some sort of ulterior motive with respect to their views. That doesn’t mean they are bad people. It just means they are human.
There are always going to be exceptions who take advantage of others in any industry. The key is knowing how to differentiate the good advice from the stuff of speculation and deceit. That starts with approaching every new idea with skepticism and being able to complete your own due diligence with an independent viewpoint. In other words, take a step back from the sales pitch and look at the opportunities and risks from all sides.
If it sounds too good to be true, it probably is.
Whether you are buying a newsletter, hiring an advisor, or simply evaluating a new stock for your portfolio, you MUST analyze every relationship to ensure it lines up with your goals.
Ask yourself these simple questions:
- What is the source of this recommendation or investment idea?
- How is this person being compensated?
- Are their claims consistent with my own experience?
- What is my time frame for owning or evaluating this investment?
- What are my other alternatives to this relationship or investment?
- What are the inherent risks in this endeavor?
- How does this investment compare to an individual stock, ETF, or mutual fund?
One of the reasons I love ETFs is that they are one of the more conflict-free investment mediums out there. There is no charismatic fund manager or CEO. There are no hidden sales charges or compensation arrangements that would seduce an unscrupulous promoter. All of the holdings are disclosed on a daily basis for complete transparency. The majority of ETFs simply provide low-cost exposure to a diversified basket of stocks, bonds or commodities.
The big fund companies like Blackrock, Inc. (BLK), Vanguard, PowerShares, Charles Schwab Corp (SCHW), and WisdomTree are heavily regulated and have little to gain from illegal activity. One day we may see a small ETF company charged for violating SEC regulations. However, they will likely be the very minor exception to the rule and will have doubtfully gained any measurable edge from it.
Blindly following the advice of anyone (including me) is a recipe for disaster. Ultimately, you are the one responsible for the outcome of your portfolio and the people you align yourself with to manage it.
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