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Chuck Jaffe Archives | Email alerts
Nov. 13, 2011, 12:01 p.m. EST
By Chuck Jaffe, MarketWatch
LAS VEGAS (MarketWatch) "â? Tom Lydon had just finished a speech at the American Association of Individual Investors Conference here when a woman came up to him, pen and paper in hand, with a simple question: "Would you tell me what ETFs you invest in?"?
Lydon, editor of ETF Trends, graciously shared the ticker symbols of his portfolio positions. The woman scribbled notes, thanked him and left.
I asked Lydon what he thought she would do with the information.
"I don't think she'll buy all of them,"? he said with a laugh, "but she will at least go look at them."?
That's the problem. Members of AAII typically are motivated, self-directed investors. But put 1,200-plus of them together for a conference and you still get plenty of "Can you give me that ticker symbol?"? behavior. That's where someone hears a recommendation, makes sure they have the trading symbol correct and goes off to buy based mostly on what some expert said, rather than on their own research.
The danger of that situation is clear, particularly in the case of the woman who approached Lydon.
What she got was a list of his current holdings, without any sense of the portfolio weighting. She could assume he spreads his money around evenly "â? he doesn't "â? but she has no clue which fund is his biggest holding or his least consequential.
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Further, Lydon's newsletter isn't called ETF Trends for nothing. Tomorrow or next week or next month, based on what the market does, he might change his positions and tilt his portfolio in a different direction. Unless the woman subscribes to his service, she'll be left with a stale list of recommendations.
It's an important point because investors now are desperate for actionable advice. I met countless investors at the conference this week who said they came to the event mostly looking for ideas and strategies they can believe in.
While the AAII crowd has plenty of market savvy "â? go to AAII.org to learn about the group and to find a chapter near you "â? they're not immune to dropping their guard because some guy with a reputation just dropped a stock tip.
It's not that tips are bad, it's just that they're only as good as your information about the name-dropper and your follow-up.
It reminds me of a story that's now more than a decade old.
The weekend before the market peaked in 2000, the Miami Herald held a personal finance fair where financial commentator Jim Cramer was the headliner. He dropped the names of his four favorite stocks at that moment, though he warned the crowd that his opinion could "â? and most likely would "â? change.
A year later, with stocks in the clutches of a bear market, the Herald sponsored another event where I met a woman who had bought Cramer's four names, all of which were down more than 85% at that point. Through his Web site and radio show at the time, Cramer had told investors within days of the 2000 event that his opinion on the stocks had changed, and that they needed to get out.
That woman never got the message. As the stocks cratered, she held on largely because the stocks had been recommended by an expert.
It's a harsh lesson, but one worth learning for anyone tempted to take free advice from someone they trust as an expert.
Expert advice "â? in the form of names and ticker symbols kicked out in seminars, articles or on television "â? come with a disconnect. There's enough information to trade on, but not necessarily enough to invest with, and the most important thing is what happens after you follow up on a tip.
Financial pros know all of the reasons why they like or dislike a security. They understand their methodology, and they have a sell discipline. They publish the newsletter or manage money, so they are the first ones to know when their mind has changed; they will get the best of their own counsel at all times.
The person taking the tip gets their investment du jour, but when a new day dawns they are on their own again.
"I worry when I give out names,"? Lydon said. "You know that's what people want, but that's also where they can get into trouble. "? People are desperate for advice right now, but they can't be desperate about taking it. It can't just be "?Some guy talked about this, so I'm buying.' "? No matter how scared the market makes you "â? and how confident you are about the expert "â? investing, especially in these times, is about more than acting on tips."?
Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.
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Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund... Expand
Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund investing in America. He also writes a general-interest personal finance column and the Stupid Investment of the Week column. Chuck does two weekly podcasts for MarketWatch, and frequently makes guest appearances on television, and on radio shows across the country. He is the author of three personal-finance books. His latest, "Getting Started in Hiring Financial Advisors,"? was published in the spring of 2010 by John Wiley & Sons. Collapse
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