Find out the pieces of worst investment advice by the world's biggest investors and know what they really mean.
Hey Bow Tie Nation, here with a fun video today but no less important to making you a better investor because today, we’re counting down the top 10 dumbest things said on Wall Street…the ten investing quotes and advice that are so moronic, so meaningless that you’ll wonder if it’s CNBC or Ringling Brothers!
Nation, flip on your favorite investing show or click over to any website and I guarantee, you will hear these all day long…investing advice that sounds smart but makes no sense when you actually try to use it…or worse yet, loses your money!
And the real tragedy is, that a lot of these investing ideas could be good advice if the mindless zombies masquerading as experts just added a few words. In this video, we’ll countdown the 10 worst pieces of investment advice by the experts. I’ll show what they say and what they actually mean, then reveal how to look at each to make better investing decisions!
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10 DUMBEST Pieces of Investment Advice from Experts
And we’re starting with the most popular investment advice but also the most dangerous…buy the dip!
This first one could be the most overused investment advice in history, repeated anytime a stock falls half a percent. And the problem here, what you’ll see in so many of these worst investment sayings is…it is so vague that it does more harm than good.
The idea here is the ‘expert’ is saying they’re bullish on a stock or the market and that they don’t think this ‘dip’ in the price will become a full-blown stock market crash. And even the words here are persuasive right? It’s just a quick dip and the stock price will move higher.
But the reason this is so ridiculous is that nobody ever says what the dip is, how much of a dip you should watch for or what happens when a dip becomes a drop! Investors hear buy-the-dip and they buy more stocks every day when the stock drops half a percent. That’s fine in a market that only seems to go up but what happens when the ‘dip’ is something more? Investors push all their money into a few dips…then start borrowing on margin to invest, and eventually reach the end of their rope before the market is done dipping!
To give this investment advice meaning, you need to do more than just jump at every dip in stock prices. Set a target on the stock for a larger drop, maybe three- to five-percent before you go bargain shopping. Set limits to how much dip-buying you do before you hold your remaining cash for a bigger drop. Pick just a few stocks from your portfolio, only the very best you really like, for ones where you buy-the-dip more frequently, so you’re not chasing every stock lower.
Number 9, another favorite but meaningless piece of advice…buy quality stocks or quality companies!
Nation, this could be the single laziest advice investors will ever hear, buy quality stocks. Basically, the ‘expert’ is saying they don’t know what the hell you should buy but if you take their advice and still lose money…it’s your fault because you didn’t buy a ‘quality’ company.
And if the analyst means anything, usually they mean value stocks here, stocks with low PE ratios and strong balance sheets. Stocks of companies in stable industries with consistent cash flows rather than growth stocks that, while they may be good companies, usually have less stable cash flows and higher price stocks.
Using this definition though paints the expert into a corner of value stocks versus growth, which hasn’t worked since the financial crisis. In fact, the difference in returns has only increased between this definition of quality.
So instead, the pundit or expert just leaves it vague. It’s much easier to say ‘buy quality’ and shift the blame to the investor than to say what you really mean.
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The Wall Street Secret You Must Know
Folks, I’m going to let you in on a dirty little secret of Wall Street, one I learned over more than a decade working for venture capital and private wealth management…most of the people you see on TV, the experts, are complete morons! They’ve been trained on a steady diet of these investment quotes and it’s so much easier to regurgitate the nonsense than to actually say something meaningful and take responsibility!
Now part of this advice is just unsaveable because…no shit, you should always be buying quality stocks. In fact, anyone out there, if you’re buying crap companies just let me know in the comments below and I’ll tell you where to mail the check. But there are a few other things you can do here to give this advice a little more meaning. First, have an objective measure for how you define quality, what you’re looking for in the financial statements or ratios to find the best stocks to buy. Also, don’t feel like you have to jump on every stock pick. Limiting your portfolio to only the 15 to 20 stocks you really like is going to mean you’re only in those quality names.
We’ve still got eight more to reveal but if you want GOOD investment advice, get the Weekly Bow-Tie, our free market newsletter with the most important news, investing ideas and strategies you need to know. It’s totally free, just something I like to do for you out there in the community so look for the sign-up link in the description below.
Next up, a favorite of Warren Buffett, to be fearful when others are greedy and greedy when others are fearful…but what does it mean?
And this is another one that sounds so smart, like it’s the kind of stock market wisdom that is going to make you rich! The market can be a wild roller coaster of prices. If you were able to buy into the S&P 500 at the lows over the last 30 years, when investors were panicking, and sell when they were most greedy…you would have turned a 10% annual market into a 15% bonanza! That’s a difference of 16-times versus 68-times your money!
But as they say…the devil is in the details and nobody every says when exactly to be greedy or fearful. Every day since the bottom of the financial crisis, all 4,500-plus days, someone has wondered…are investors being too greedy…are stocks too expensive. And every single one of those days, you would have lost money being fearful.
Now there’s a lot to be said about this idea of going against the herd mentality, it’s one of my favorite strategies…mainly because I’m an argumentative asshole, but also because it can produce higher return…if you do it right!
Being fearful or greedy means managing your stocks, bonds and cash in a way that let’s to take advantage of overbought or oversold markets but leaves room to profit if you’re wrong. If you think stocks are expensive and investors are being greedy, you don’t sell out of everything. Take profits and hold maybe 20% in cash at first, if the market keeps going up, sell another 10% and hold it in cash or bonds. Do it in stages like this and have a formal approach for when you’re going to buy and sell, not just when some market hack on TV says so.
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Number seven on our list of worst investment advice, being cautiously optimistic!
This is the ultimate in trying to hide the fact that the talking head on TV doesn’t have a clue of where the market is going. Basically what this is saying is stocks could go up or down but the analyst doesn’t want the responsibility if they’re wrong.
And you hear this most when stocks look expensive, when there are real economic reasons the market could stumble, but prices have kept rising and the analyst doesn’t want to reach down, grab a pair and make a decision.
It’s the ultimate safety punt because…hell, given enough time, everyone that is cautiously optimistic is proven right. Even if stocks fall the second the words are uttered, the market is going to eventually rebound and prove the optimist right.
The best thing to do when you hear someone say they’re cautiously optimistic, after you stop laughing anyway, is just to list out the reasons to be either. Lay out the reasons to be optimistic in stocks versus the reasons for near-term weakness and make a decision.
Nation, you can be optimistic and make money. You can be a market bear and make money. When you will NOT make money is if you try to be wishy-washy and sit in the middle of the road without the strength of your convictions.
Next on our list, you hear this one a lot, taking the wait-and-see approach!
This is a favorite of economists, a profession so unsure of itself that it makes astrology look credible. A big problem here is for investors and analysts to cling to past decisions, even in the face of contradictory data. If the analyst previously called for stocks to keep rising but then the jobs number is surprisingly bad, they’re going to take a wait-and-see approach instead of honestly reevaluating that past decision.
In reality, it’s just another excuse to avoid making a decision. The analyst will point to some other market question that they want to wait on for more clarity…and believe me, there’s always another question to wait on.
Nation, there’s a term used in the military called the ‘fog of war’ and means you’ll never have complete certainty about a decision but you need to balance that uncertainty with the urgency in making a decision. The general that waits for complete certainty on success of his strategy is going to be outflanked by the enemy that took a chance, that made their decision without waiting.
It's the same thing with investing. You will never know everything you want about a stock or the market. There’s always going to be some uncertainty but nobody ever made money waiting to invest. Think through the investment with everything you know and make a decision!
Half way down the top 10 dumbest investment quotes, anytime someone says, the market is climbing a wall of worry!
Now this is actually supposed to be a positive for the market, though some pundits will use it wrong. It’s supposed to mean that because some investors are worried about an upcoming event or market data, that there’s still some cash that can be invested and push prices higher. If everyone was overly positive on stocks, then there’d be nowhere to go but down. Everyone would be fully invested and stocks would be priced for that perfection.
But this is just another cop-out because, like we saw in that last graphic, there is always something to worry about in the market and always someone worried. If it’s not the economy then it’s earnings investors are worried about. If it’s not that, it’s politics. There is always something and buy just using blanket statements like this, it’s just an excuse to not actually do the analysis on how market factors could swing prices.
For this, instead of just making vague statements, you can actually quantify how much of the market is worried and how many might be fully invested. You can look at data like the net margin debt, that’s the amount investors have borrowed to buy stocks and always surges as too many get optimistic and before a market crash. You can look at the number of stocks making new 52-week highs versus lows to see how worried the market truly is instead of just making ambiguous assumptions.
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Number four on our list, one of my favorites, THIS time is different!
Actually this one isn’t used as much because everyone recognizes it as a joke when it’s said…but like the rest of these sayings, you need to go beyond just the vague sound bite.
The idea with, this time is different, is an attempt to explain a high price for a stock or the market. To explain why, even though in the past when stocks were this expensive the bottom fell out of the market, despite that there are factors right now that can support stocks higher. This time is different.
But as much as someone saying, this time is different, makes people roll their eyes…there’s always some truth to it. Obviously no two moments in history are going to be alike and one bull market isn’t the same as the last. Understanding whether stocks can keep going even beyond high valuations means thinking through how things truly ARE different.
Common Warning Signs to Look Out For in the Market
The other side of this is, as Mark Twain said, history doesn’t repeat itself but it does often rhyme. A lot of times, there are common warning signs and commonalities to the market that you can look for to understand the market. One example, Scott Nations points out in his book, “A History of the United States in Five Crashes” which is an amazing book not only to understand stock market crashes but for anyone that likes American history, but Nations points out four common traits of most crashes.
In his study of five market crashes, Nations finds most see a huge run in prices over the last two years. This is more than just the steady build in prices through a bull market but returns of twenty- or thirty-percent and more as the stock frenzy builds. Crashes also often come after some new financial innovation has been launched that people really don’t understand, things like the Bank Trust, Investment Trust or Portfolio Insurance. These innovations often allow huge growth in leverage, allowing investors to borrow and bet trillions on rising stocks. And finally, often the government will step in for an attempt to fix some market inequality with taxes, regulation or reform and will end up spooking the market.
Two more to that worst investing advice you always here, next is telling investors to be ‘ready’ for a five-percent correction!
This is another total cop-out for the experts, presenting a positive opinion on stocks but warning investors there could be a five- or ten-percent correction coming.
First of all, they rarely put a time frame on this so it’s another one of those NO SHIT moments. In a study of the last 20 years, Schwab found that pullbacks of at least 10% happened in more than half the years, 11 out of 20, and smaller dips of five- to ten-percent happen twice a year on average.
So warning investors of an eventual selloff isn’t much of a warning at all. It’s going to happen, and probably within the next year, but it doesn’t help unless you put a time frame on it.
It’s also just another way for market pundits to not take responsibility though. They can be as positive about stocks as they want, tell investors what they want to hear, and if stocks end up falling…well they warned you there might be a correction coming.
To be of any use whatsoever, these correction warnings need to have a time frame attached. Why might stocks weaken and when within a span of a few months. They also need to offer alternatives, if stocks in a specific sector will weaken most which sectors might investors look to for safety? And the predictions need to tell you when to decide if the correction is coming or if the risk has passed.
We’re almost there, the dumbest thing said on Wall Street, next is calling it a stock-picker’s market!
OK, I need a break. Working through all these, it can be easy to get frustrated with the market, with all the bullshit that goes on and this one is probably the biggest pile of the bunch…but what I’m trying to do here, what I hope you’re getting out of it is you can take these little nuggets of investing advice and you can use them to be a better investor. All it takes is a little more research, looking at things a little more closely than accepting the most overused cliches and sayings.
But this one, proclaiming a stock-picker’s market, is really just as worthless as it gets.
The expert here is trying to say that the stock market is going to be volatile, could even fall over a period, and that you’ll only make money by picking individual stocks rather than investing broadly across the market. Basically, it’s a way for analysts and portfolio managers to justify their six-figure paychecks for picking stocks.
The truth is though, it’s always a stock-picker’s market. There are always going to be individual stocks that beat the market and those that underperform. For you as an investor though, it’s not a question of when you’ve got a better chance of higher returns but what kind of investing best fits your personality. If you can take the higher risk and volatility in your portfolio, if you don’t mind spending the extra hours to research stocks and you can handle the stress…then you’ll want to pick stocks in any market. If on the other hand, you don’t want the stress, if you just want the market to do its job over time and to make you money, then you’re better off investing in broad market funds and getting the market return.
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The number one dumbest investing advice you hear ALL the time, forecasting weakness far into the future!
This is like a game analysts and pundits like to play called…um, I have no clue. This is where they’ll take a position on the market, either positive or negative but usually positive, and then give the conflicting position for more than six months’ out.
So for example, the expert will say they think the market can continue rising but then might face weakness in the second half of the year. Or in the first half if they’re already in the second half.
Basically this is just another meaningless hedge so they don’t take responsibility for a bad call. If the market keeps rising…well, they were right and if that second-half weakness never appears then who the hell is going to remember one opinion out of the dozens you hear every day?
If on the other hand, if that weakness happens earlier so if stocks start falling before the second half, the analyst can always say, ‘Well, I knew it was coming, it was just earlier than expected but I did warn you.”
And just like the calls for a market correction, these need to have a time frame and be better defined. Hell, some of these will even call for market weakness years out into the future. But to have any kind of meaning, they need to spell out the risks and the alternatives.
Read the Entire Investing Series