Are you at the same wavelength as your financial advisor?

by Manshu on January 16, 2009

in Opinion

A friend of mine was kind enough to send me a report by an Investment Bank, that had their top Indian stock picks for 2009.

The report lists out each stock pick, and the rationale behind selecting it.

I present one rationale here – the difference between the price of the stock pick, and another industry bell-weather is greater than 20% (the other one is higher). Traditionally, this difference has always been less than 10%, and so the stock is undervalued.

To take an example – Apple has always been around four times the price of Microsoft, and today Apple is just thrice the price of Microsoft. That makes – Apple – an undervalued stock.

Granted, this is just one of the several reasons they give, but, to me, this is absurd at so many levels – that it made me close the report itself.

The most obvious question is what makes the analyst think – this stock is undervalued? Why isn’t the other stock overvalued? Why not short that stock, instead of buying this one?

All of us take a lot of advice from a lot of different people. We read investment books, watch financial news, read investment journals, watch videos on Youtube, listen to friends who are in the industry, and of course in boom markets – we take stock advice from the postman as well.

While it is easy to dismiss investment advice from the postman, it isn’t always so easy to dismiss advice doled out by “experts”  – who make a living out of trading and investing – day in and day out.

Most of the time, this is because we are not able to question the opinions. For instance, I do not have access to the investment analyst who wrote the report, and ask him why the other stock isn’t overvalued?

If I think about the statement a few times, and start rationalizing it, pretty soon I will understand what he or she is saying, and start agreeing with it. That is primarily because I am overawed by the name of the Investment Bank that is printed on the report, and the analyst attended a B-School that summarily rejected me.

But I will not do that: I have learned from my mistakes, and learnt that the worst thing you can do is to follow advice of people who are not at the same wavelength as you. If you follow such advice – you lose a lot of money at the end of it, and feel like a fool for not listening to your own instinct.

Whoever you take your financial advice – should be at the same wavelength as you. You should clearly understand what he or she is saying, and not buy into their stories because of the logo of their firm, or the brand of the college they graduated out of.

At the end of it, you may well find out there are only two or three people who you listen to – but if you follow your gut, you will not regret it. This doesn’t mean you stop listening to disagreeing opinions, if you do that, then, that is the end of your intellectual growth. But, at some point you have to draw the line, and say – this just doesn’t make sense.

Investing is common sense and patience – and if someone behaves, as if you are too dumb to understand why a butterfly spread is good for your portfolio – you need to replace that someone.

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