The key to success in anything is picking what advice to take.
The good news is there are only three types of advice.
There’s good advice. You get it all the time from friends, family, colleagues, etc. If you get enough of it and and follow it, you know the benefits.
There’s bad advice. You get it from the same sources. It’s far more common than good advice. And you’ve taken it, we’ve all taken it, and know the consequences too.
The third kind of advice is the absolute worst though. It’s unsolicited advice. It may be good or bad, but it’s usually just annoying and possibly offensive depending on the source.
The bad news, however, is knowing the difference between good and bad advice isn’t always easy in life…and it’s even tougher in the financial world.
Here’s a quick way I’ve found to know immediately you’re getting bad investing advice.
Sounding Smart...Being Stupid
One of the most critical elements of being a stock market commentator is sounding smart.
I’ve worked in a lot of research firms and can’t tell you how many of my former colleagues have absolutely no money on the line.
In one case, a popular authority option trading advice I’ve worked with (you’d know his name if I told you) was banned by his wife from trading options personally.
I don’t blame her either. He managed to make a small $5,000 “trading only” account disappear in about three weeks and was done with trading options forever, but not done giving advice about them.
The thing is, he sure sounded smart though. Probably sounded the smartest in the entire firm.
Regrettably, he’s not alone in that juxtaposition either.
Having been around them though, I can tell you their tricks and show you how to avoid them.
The most easily identifiable trick they use is inarguable cliches.
Here’s three of the most common cliches they use which sound really good, but if you really think about them, you quickly realize you should disregard every single word that follows.
“It’s going to be a stockpicker’s market moving forward…”
This is one of my personal favorites. I laugh every time I hear it.
It sure sounds good. But it really couldn’t be more meaningless.
There will always be some stocks that go up. Even in 2008 there were a few stocks that went up.
So when you hear something like, “Look at Amazon, it’s soaring. Three months ago I told you it was going to be a stockpicker’s market, and I was right,” be very worried.
This one does have an exception. If they actually recommended Amazon to you, then they deserve a pass.
“I see a lot of volatility ahead…”
This one is particularly valuable from the commentator’s perspective.
Stocks go up and down all the time.
There has been a 5% or greater correction in stocks on average every four months since the last stock market bottom in 2009.
So this “prediction” is a perfect one to make any time you have nothing of any value to say.
Check out this seemingly prescient and wise article from CNN titled The Stock Market is Long Overdue for a Big Drop came out last June it was bound to be right.
One of the commentators in it, David Bianco, Deutsche Bank’s U.S. equity strategist, warned, “We believe the probability of a 5%+ dip is high this summer...”
Three months later the Dow was down around 1,000 points in a single day.
What a call!
Of course it was a great call. There was no way it couldn’t be great. And therefore completely meaningless to begin with.
“You have to be defensive here…”
This one is probably the most meaningless of all.
It’s the ultimate catch-all prediction for the commentator who lacks any sense of self awareness.
If you own 20 to 30 stocks or ETF’s, some will take a dip. It’s inevitable.
When some of them do drop, you can bet the person who makes a statement like this won’t be too far away with something like...
“Sure, you lost money, but I told you to be defensive...you should start listening to me more.”
Let me get on that...useless jerk.
It’s just awful all the way around.
If you hear any of these cliches, run away.
After all, they’re a clear indicator unfounded, unproven, and generally bad advice is about to follow.