Roundtable: The Worst Investment Advice You Ever Got

Worldwide Invest Better Day 9/25/2012

In the lead-up to Sept. 25's Worldwide Invest Better Day, The Motley Fool is reacquainting investors with the basic building blocks of investing.

Yesterday, we held a roundtable asking a group of our top analysts for the best investment advice they ever got. Today, it's time for the flip side... the worst investment advice they ever got.

This may be even more fun. Here's what they said.

Dan Caplinger: The worst investment advice I ever got was from the full-service broker my parents used. He had me invest in a bunch of index-tracking mutual funds that included high annual fees as well as a back-end sales charge that locked me into the funds for several years. Later, I discovered I could get a nearly identical set of funds that would save me several hundred dollars in fees each year. In the end, I decided to pay a 2% sales charge in order to get out of the costly funds as soon as possible. But I've been critical of full-service brokers ever since, and the experience taught me just how important it is to reduce investing costs wherever you can.

Anders Bylund: There's nothing wrong with diversification -- as long as it's properly done. But spreading out your investment dollars without a clear strategy is "diworsification" at its worst.
As a young investor, I was informed that my portfolio really needed more balance across both geographies and market sectors. After much hand-wringing, I picked a Japanese carmaker, an American megabank, a large pharmaceutical specialist, and some other things I barely understood.

These were some of my worst investments ever. When I finally closed out the last of my diversification plays, they had all gone sideways at best over nearly a decade. That's dead money, while I was handily beating the market in industries that made sense. My portfolio would be much fatter today if I had doubled down on the technology and media stocks close to my heart, rather than wasting my time on diversification for its own sake.

Matt Thalman: I was new to investing and talking with a co-worker. He claimed his brother was buying tons of shares of this little-known mining company that was about to hit it big. Sound familiar to anyone? So I go and buy a few thousand dollars' worth of this penny stock. For months nothing happens, then about a year later, cha-ching. In a matter of days the stock was up tenfold. (This was before I had been given the best investment advice ever and my emotions took hold. Greed! I made a good deal of money, but didn't sell when I should have.)

So if you haven't guessed it, I owned a stock, then coincidently it was pumped by a penny stock scam . So why was that the worst advice I was ever given? Because, still to this day, I know it was just dumb luck that I made money on this, but I still find myself looking at penny stocks from time to time. Dreaming of hitting it big again when I know I'd be better off burning the money I would invest in these stocks.

Morgan Housel: I've never owned a house. And I can't remember how many times I was told in 2005 and 2006 that, "You're throwing your money away!" by renting. I didn't take the advice to buy, but I came close. It was offered by so many people whom I admired. When everyone around you is making a fortune doing something you're not, you start to question yourself.

In hindsight, it was terrible advice. Tens of millions of Americans have seen their net worths destroyed by the mistaken belief that owning a home is always and forever a good thing. I think the belief persists to this day. And it's just wrong. The decision to buy a home is a complicated one that rests on how long you can stay in one area, how stable your job prospects are, the comparability of local rents, population growth in your town, and of course, housing prices. Owning makes sense for a lot of people, but it's not a slam dunk. Renting is a superior option for millions of Americans. 

LouAnn Lofton: "You'll never make money in stocks. You're not smart enough, you don't know enough, and you're not trained in this." Thanks, but no thanks, Mr. Sneering Condescending Financial Advisor. I was young when I started investing, sure, but I didn't deserve that. Luckily, I'd already read about and been inspired by legendary financial gurus like Warren Buffett and Peter Lynch, (soon I would also learn about this amazing community of do-it-yourself investors called The Motley Fool) so I was not intimidated and I was not swayed by this guy's "charm." Ah, the pleasure I felt standing up and walking out of his office. I haven't looked back.

Anand Chokkavelu, CFA: Beware anyone's advice on their "love stock." When someone's enthusiasm for a company starts to sound like fanaticism for a sports team, the logic can get twisted and the objectivity can get nonexistent. That goes for our love for our own stocks as well. As an example, I love my shares of Accenture, but since it's my former employer I have to watch for nostalgia and familiarity clouding my judgment.

Molly McCluskey: Wait until you're out of debt before you start investing. What a terrible idea! In my twenties, I had student loan and credit card debt. Now I'm saving for a mortgage. Who knows what other expenses will come along. The trick is to keep investing in spite of them.

Had I been smart, I would have been socking away every little extra bit that came in from the second I finished undergrad. I would have gone to the movies less and rented more, packed my lunch, taken the bus, rented smaller apartments in cheaper cities, had more roommates, visited the bookstore less and the library more, and put all that money away. I would have developed the habit of investing, long before there was anything to show for it.

Tim Beyers: On the advice of a financial professional, I once bought a thinly traded penny stock. His pitch: The business was essentially trading for the cash on its balance sheet, making it a screaming value. And I bought it, hook, line, and sinker. What I should have realized is that cash comes and goes all the time. Genuine competitive advantage and skill in allocating capital, on the other hand, are rare. My shortsightedness cost me thousands of dollars that should still be sitting in my retirement account.

Eric Volkman: "Don't worry about it -- open a position! They own that huge asset and it ain't going nowhere; sooner or later, they'll have to turn a profit. Really!!" So said a colleague of mine about one particular company, the name of which I won't reveal (OK, OK, it was France/Britain's Eurotunnel). That asset (the Channel Tunnel) was a big and impressive one, all right, so much so that I cheerfully ignored the company's many other problems... plus the fact that it didn't technically own the tunnel. I bought a thousand shares. Wh-hoops! The problems deepened, the debt widened (yes, I ignored the Best Investment Advice I Ever Got), and the stock tanked. Which is what I get for not digging deeply enough into the operational and financial aspects of the company. Yes, Virginia, these are important. Lesson learned.

Chris Baines: "The trend is your friend." If I had a penny for every time I've heard this, I'd be a trillionaire. Unfortunately, this piece of "wisdom" is not true for any real investor. (I'll grant you, the trend is the friend of journalists looking for clicks.)

As an investor, the trend is not your friend, it's your worst nightmare. When the stock market peaked in 2000 the trend was up. When the stock market bottomed in 2009 the trend was down. Let valuations be your guide instead of letting a stranger's actions dictate your moves. That's what the best investors have historically done (I'm thinking Buffett and Peter Lynch) and will continue to do.

Jacob Roche: "Be diversified" can be a useless bit of advice.

A lot of investors use the Peter Lynch "buy what you know" approach and buy shares of companies like Apple, Starbucks, Disney, and Coach and think they're diversified. After all, they've got technology, restaurants, entertainment, and apparel, a diverse-sounding group of sectors. But each of those sectors is highly dependent on consumers, so the true risk remains the same.

Even if an investor buys a broadly diversified S&P 500 index fund, his or her investments are still heavily weighted toward the United States, and even if an investor buys an even more diversified Morgan Stanley Capital International All-Country World Index fund, he or she is still betting everything on stocks, while ignoring other asset classes like bonds, real estate, and other alternatives.

Diversification as a concept is deceptively simple and lulls many investors into a false sense of security, but experts are still arguing over what risk is, exactly, and what diversifying means. The reality is that there is no magic wand to wave risk away, and while broad diversification is good, an investor should still be cognizant of the risks he or she is taking.

Tim Brugger: There was a time not so long ago when municipal bonds were high on my investment priority list. Limiting my tax bill -- even at the expense of longer-term growth -- was very appealing. It was my own, personal stand against the IRS and state tax man.

As I conducted my due diligence, I came across a local bond trader and decided to give him a shot. After discussing various laddering strategies and reviewing alternatives, he said something that still causes a snicker from me today.

"The great thing about municipal bonds, beyond the obvious tax benefits, is that it really doesn't matter if they're investment grade or not. I mean, it's not like a city or county is going to go bankrupt or anything."


Dan Newman: I started reading the ZeroHedge website about a year ago, and while entertaining and a good view from one extreme side of things, the main takeaway of buying gold, guns, and shelf-stable food would have severely underperformed the market. Pessimism about the economy will always be around, and should be considered, but if you squirrel away all your money, precious metals, and cans of beans and wait for the apocalypse, you may only be right once. Meanwhile, if you invest in value-generating businesses, you can help create wealth and a better society, and ensure your future until doomsday happens.

Evan Niu, CFA: Try to use technical analysis. As a former registered broker, I've had my fair share of experience with literally thousands of traders attempting to time the market by reading charts and picking up on technical signals. It's a losing proposition the majority of the time, in my opinion. A few will make it work, but far many will lose trying.

Andrew Marder: I'll probably repeat it until I die, but nothing has caused me more heartache than investing in companies that I know -- thanks, Mr. Lynch. It's my own fault, but I tend to really know, from actual experience, two kinds of companies: boring companies and banks. Here's a tip, don't invest in either of those two.

The first batch isn't so bad. I know Williams-Sonoma, and it's starting to do some really good things. I know Starbucks, but knew it best when it was flopping around like a missed fish at Pike Place. And I know Barnes & Noble. The second basket is less boring, and is instead a little nightmare. Not only do I know banks, I know British banks. Reading the annual reports requires a homemade Enigma Machine, and even then it's not always clear why the stock does whatever it does. 

So I've tweaked that advice: Invest in companies that you, your oldest friend, and a college kid know. That should keep you out of the slowest, and most dangerous, stocks.

Keith Speights: The worst investment advice I ever received was that buying individual stocks was too risky. I held back from buying stocks and only put my money into mutual funds for years. While there certainly is a level of risk in buying stocks, risk exists with any form of investing. The better advice would have been to be aware of the risks in buying individual stocks and learn how to manage that risk (through diversification, for example).

Sean Williams: I know this might sound brutally counterintuitive, but the absolute worst advice I've ever latched onto was Peter Lynch's advice to "buy what you know." Now don't get me wrong, I whole-heartedly agree that you should be able to describe what the company you own does as if you're telling it to a child, but Lynch's investing mantra boxed me into researching a very small swath of companies.

Since abandoning Lynch's market view years ago I've uncovered an incredible number of gems that I would never have discovered had I not actively sought out new ideas, concepts, and technologies. Investing is a constant learning process and Peter Lynch's investing thesis was curbing that want to expand my investing universe.

Chuck Saletta: The worst investment advice I ever got came from a broker who talked me into a high sales charge, high ongoing fee, and high churn technology fund in the mid-1990s. I was still in school and wanted a way to invest my summer earnings, and he was very eager to turn my hard-earned cash into commissions for himself. The tech bubble was in the process of forming, yet somehow (probably due to the charges, churn, and fees), my fund never seemed to rise all that much.

Fortunately, I did sell the fund before the eventual tech bubble burst -- but not due to any incredible flash of investing brilliance. I simply needed a down payment for my car, and that was the only real savings I had.

Alex Dumortier, CFA: In the mid-2000s, I bought the shares of Journal Register, a publisher of local newspapers, after reading the analysis of a fundamentally oriented research organization. The thesis was that the shares were cheap enough to account for a heavy debt load and the secular decline of the newspaper business. The shares just got cheaper and cheaper and the research organization was forced to bring its valuation down multiple times. I ultimately exited the investment for a near total loss and the company filed for bankruptcy. This month, Journal Register filed for bankruptcy again. The lesson here is that no margin of safety is great enough when investing in a business with declining economics. That may not be an absolute rule, but behaving as if it were will spare you plenty of aggravation. There are easier ways to make money.

We hope you enjoyed the roundtable. Click on the button below for more on Worldwide Invest Better Day.


Anand Chokkavelu owns shares of Accenture. The Motley Fool owns shares of Apple, Walt Disney, Coach, and Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, Apple, Williams-Sonoma, Walt Disney, Coach, and Accenture. Motley Fool newsletter services have recommended writing covered calls on Starbucks. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 14, 2012, at 2:09 PM, prginww wrote:

    When the "Million Dollar Club" expounded upon the virtues of IRISH BANK and even went abroad to be sold and sell it to fools like me, I bought.

  • Report this Comment On September 14, 2012, at 2:35 PM, prginww wrote:

    My worst advice came from a relative. Shortly after the economic crash, there was a small bank in California (I forgot the name). It it was paying a 10%+ dividend. I jumped in with all my spare cash. I collected at least one dividend. Thankfully I got cold feet and exited before i lost much money. My brother wasn't so fortunate, I think his loss was into the 6 figures. He hates the market to this day and has stuck to real estate and businesses ever since.

  • Report this Comment On September 14, 2012, at 3:02 PM, prginww wrote:

    "Buy what you know" is terrible advice if you don't know much, or if you know only a small part of what's out there. A small-l liberal education and a lot of curiosity are necessities for Lynch's maxim to work.

    I know that following his maxim (before I even knew who he was) cost me dearly years ago. I bought stocks I knew in businesses I knew--and they stunk. I still try to follow his advice to this day, only I'm endlessly curious and always looking to know more.

    The other terrible advice I recall is twofold--One, "The market is bound to go lower, so hold off on buying", and Two, its pal, "The market can't go higher, sell now!" Anyone who says they know exactly how to time the market is a liar.

  • Report this Comment On September 14, 2012, at 5:25 PM, prginww wrote:

    The worst advise I ever received was the trading options is an easy way to make money!! It's NOT easy!! It is learnable, however! But not fast and NOT easy!

  • Report this Comment On September 17, 2012, at 1:17 PM, prginww wrote:

    I echo the "buying a home" advice given by Morgan Housel. Hearing all of my friends and family members echo this advice made me think that I was setting myself back financially years by not owning. After looking for the right place in New York City for more than a year and saving up my hard earned cash for a down payment, I bought... in May 2007, right at the top of the market. Luckily for me I bought a place that I could afford and planned on living there for a long time, so the losses, for me, have only been on paper. But the experience of seeing a virtually identical apartment in our building sell for nearly 30% below the price I paid for mine gave me nightmares for weeks.

    Lesson to be learned: Avoid bubbles. When everybody is telling you that investing in something is a sure thing, it is likely exactly the opposite.

  • Report this Comment On September 17, 2012, at 1:55 PM, prginww wrote:

    Worst advice was from a full-service broker for a rollover that I wasn't paying attention to. He would sell (at his discretion) chunks of mutual funds (with 2% annual fees) to pay for his 1% fee. The advice: "Don't worry about this... it's industry standard."

    I wasn't really happy but what the hell, the market in the mid 90's was on fire. Then I found out the emerging markets fund I was into was losing money even as emerging markets were the best performing sector. It had been doing this for years and I was the one who had to point this out and question the adviser. He shrugged his shoulders and said that's the market. Seriously? "Don't worry about this."

    I soon became very Foolish.

  • Report this Comment On September 17, 2012, at 1:57 PM, prginww wrote:

    Oops. I meant to say the markets in the mid-2000's. Wrong decade.

  • Report this Comment On September 17, 2012, at 2:53 PM, prginww wrote:

    I have a different opinion about "buying a house" but I'm going to phrase it differently.

    I can say that in general, the worst investment advice I ever got was to "buy" something, anything that I did not understand. That included some high fee mutual funds, and some stocks. The second worst advice I got was to "sell" something because of factors I didn't understand.

    This type of advice has cost me money. For example, I once sold some warrants that I should have kept.

    Of course, the counter argument could be "because you didn't buy things you don't understand, you've missed so many opportunities." I consider that to be an invalid argument.

    Returning to "buying a house" I was given that advice over and over and in my lifetime I have purchased twice. Most recently, in 2001 I did buy a small (1300 sq. ft) condo. However, the truly bad advice I was given was to buy something much, much bigger. But I didn't.

    Instead I "ran my numbers" and decided the advice was pure hogwash. I was also of the opinion that homes should not be an investment, and data at the time suggested that homes generally appreciate over long periods at or slightly above the rate of inflation. (Thank God for the internet, but as with all tools, how they are used is entirely in the hands of the user).

    In my case it turned out very well, and I do concede that there is some luck here. But not entirely. We reevaluated our purchase in 2005 and considered something larger. The advice was "go for it." However, the numbers won out and we stayed where we are.

    BTW, I do wonder how many people want to own a home today, but instead of "doing the numbers" are following the advice of others, or are listening to the stories e.g. "How I lost my butt on my home purchase?" While we never know the future, I do wonder what they'll be saying in 2022?

    One thing I keep in mind is this. I'm responsible for my financial well being. If I had listened to selected "advice," I would never have invested in any stock. If I had listened to some of the advice I got in 2008, I would have sold and stuffed my money into a savings account (with a nod to "Mad Money Cramer"). But I didn't, I don't, and I'm darn glad.

    How will it turn out by 2022? Who knows?

  • Report this Comment On September 20, 2012, at 10:23 PM, prginww wrote:

    I bought 2 stocks based on advice from WYATT INVESTMENT RESEARCH, both have dropped 90% or more!! I've been scammed!

  • Report this Comment On September 21, 2012, at 1:49 PM, prginww wrote:

    In the '70s I bought a small amount every month in the company I worked at, thinking that I know this company and it's pretty solid. Well, I didn't know Raytheon as well as I had thought, but got lucky and was in a good company nonetheless. Then in the early '80s I graduated, moved to a new city, and one day got a cold call touting a biotech stock. I put a small amount in and it doubled quickly and I cashed out. (I knew next to nothing about the company). Now the broker called back with another great pick. All my "winnings" went into it. Biotech is hot! I now have some beautiful wallpaper and know what a market maker is.

  • Report this Comment On September 21, 2012, at 1:57 PM, prginww wrote:

    When I said "now" I meant shortly after I won the bet on the first stock. That was still in the early '80s and before I discovered Motley Fool. Fortunately that decision only cost the previous stock's gain and not a significant part of the portfolio. And it seems biotech was a little ahead of its time back then.

  • Report this Comment On September 23, 2012, at 2:20 PM, prginww wrote:

    I was in my late 70s and looking for a nice safe high dividend paying stock. My broker reccomended a Dow Jones blue chip paying 5.5%rated AAA by Standard and Poors that had been increasing its dividend every year for the last 15 years. (the last time the company had cut its dividend was 1913) So I bought 1000 shares, a steal.

    Well, guess what. 1913 all over again. The company cut its dividend, lost its AAA rating, and the price dropped to about 1/4 of what I had paid for it. There is no such thing as a 'safe' investment

  • Report this Comment On September 30, 2012, at 11:32 PM, prginww wrote:

    Great stories! Obviously investing your money requires some due diligence. I read Motley Fool and see many investing opportunities. However, I then proceed to or to get some numbers before even thinking about plunking down cash.

    Then I sleep on it. More often than not a "geat opportunity buy" turns into "well that's interesting but it does not meet my high standards".

    Last words: don't get greedy.

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