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Why following expert advices is risky for your investments?

Updated: Oct 2, 2019

Latest update: Check out our latest value stock pick: ITC here.

As an investor we often get overwhelmed by the different stock market recommendations coming from an array of fund management houses, market experts, news channels, websites and friends etc. All of this information is not only contributing to a lot of noise and conflicting opinions but also involves a lot of hidden incentives/perspectives for different people.

For an individual investor, following a stock advice blindly often results into definitive losses and hence I suggest investors to have a mindset of: "what all factors makes this stock an awesome investment" versus "what are the recommended stocks to invest in". Selecting the right stock and entering into it at the right time is something which requires skill (which gets developed over time) and we should not jump at shortcuts available to us without our own analysis.

A profitable investment is always backed by solid research, a well defined entry + exit plan from the stock and a cool mind. In this article we will discuss why we should do our own research and understand the logic behind investments versus just following advice from so called experts:

  • Stock markets are unpredictable, no one really knows where market or a stock is going to be exactly, because if anyone knows it, then he/she would put their own money in those stocks, become rich and won't need to write articles or come on news channels for money. Thus investors should not follow the advice of so called "market experts" without a solid research of their own. I am not asking you to stop listening to experts all-together, instead I am suggesting you to use these experts as just information sources to fill in gaps of your own analysis (or get a new idea). Before following these experts take a look at their previous recommendations as well and see if it actually materialised.

  • Experts recommending a stock might have different investment time horizon than yours: Many a times an expert or brokerage house will recommend a stock for "long term", but then what is the definition of "long term" for the person who recommended the stock versus the investor. The probability that it would be same for both parties is definitely not high and that is exactly where such advice will go wrong for an investor. Most of the investment advices are not given along with a definitive time horizon and in such cases an investor should either avoid such advice all together or else just take the information from the advice and make their own decisions.

  • Personal interests of a market expert may not be in line with investor interests: There can be scenarios where an institution wants to sell a stock and therefore has incentives to manipulate stock prices upwards in order to maximise profits, in that case that institution can create a positive market bias by incentivising market experts to share positive outlook about a stock. The same holds true if a company wants to purchase a stock at a lower price, in that case it can then manipulate stock price downwards by exaggerating negative news about the stock. Another way to manipulate investor sentiment is by short selling a stock in bulk or taking long positions not with intention of maintaining that position. Such activities create short term volume trend in a particular direction, combine this with some misinformation/ exaggeration/ selective-information and you can see a strong self-fulfilling prophecy. The effect of such manipulation lasts for a short period of time but that is enough to deliver losses to common investors if they don't have conviction behind their investments.

  • Know how experts manipulate data and spot their wrong guidance: A lot of us have seen articles where market experts/brokerage houses quote a stocks book value and/or P/E ratio to tell us how attractively-priced/over-valued a stock is. They at times even compare profits/revenue versus past to project a rosy/gloomy picture for a business. In this section we will see how these data-points are manipulated in order to present a picture as per the wish of so called expert versus the reality. A lot many times P/E of a stock is quoted with a statement "stock is trading at an attractive valuation of 15 times it FY22 earnings versus current industry average of 17", now on the face value it seems that the stock is available at a P/E ratio of 15 but notice that it is based on FY22 "predicted" earnings. Hence, an expert is comparing current price of a stock versus probable earnings 3 years down the line, which in itself is a fiasco as we are now getting into prediction business versus evaluating facts. It can very well be that the current P/E is 26 for the above stock (considering 20% growth in EPS) but instead of stating 26 which makes this stock over-valued an expert conveniently compared it's price with something in future which might never exist. Same happens with earnings comparison, an expert can compare earnings of a company quarter over quarter (sequentially versus same quarter last year) or year over year in order to create a justification for his/her recommendation without disclosing the complete details. I have even seen people intentionally comparing performance for only last 1-2 years for a stock because before that it was a piece of junk and they don't want investors to look at longer horizon.

  • Contradictory opinions and never trusting experts who switch their stance often: This is again a reason why I don't like expert advices on news channels. They simply flip from their own advices within weeks and there is literally no one to hold them accountable for that. In fact the news agencies which publish their advices are not willing to take responsibility of the advice, these agencies very conveniently write at the bottom of the article that "any opinion in the above article is personal opinion of author and we are not accountable for it". My argument is, if a agency can't trust the opinion of its author then how can you publish it to the masses and let these authors influence money choices of millions of people. This is the reason I strongly recommend investors to do their own research before making an investment decision. Learn how to pick market winners here.

  • Your wealth advisor cannot be trusted with your investments, you need to take things in your hands: I have seen this with my friends and have noticed it myself as well. My wealth advisor often tried to cross-sell me mutual funds/ULIPs even though when I had similar mutual funds in my portfolio. To my friend, his wealth advisor said "Here is this brand new mutual fund and this is their 1st fund which will become flagship in terms of returns, invest lump-sum amount now". There are multiple lies in that above statement, 1st: How can a wealth advisor recommend a brand new mutual fund without any performance track record of management team/fund. 2nd: How did he know that this fund will perform better than any other mutual fund with proven track record, most obviously fund manager won't even consult this dude before changing the companies this fund is invested in. So in all real probabilities this advisor doesn't have any clue about future returns. 3rd: The time when lump-sum was recommended, market was at all time high, that was the worst time to recommend that, why would a wealth advisor recommend a lump-sum at that time. The answer to these questions is simple, often the best interest of the client is not at the heart of so called wealth/investment advisors. They get commissions/cuts from mutual fund houses to push sales of specific schemes and that is exactly what these wealth advisors were doing. Now I don't say that all the wealth advisors will do this, but then a majority of them might behave like this and for obvious reasons. Hence, picking the right mutual funds for investment is something every investor should know. You can never preserve your wealth by outsourcing this task, because in all reality no one in this world will ever love your hard earned money as much as you do, everyone else will have their own interests before yours. Learn mutual fund investments here.

Thus it is important for investors to understand why they are investing in a stock and then they need to hold the stock or add more through short term volatilities/noise. If we don't have a solid rationale behind our investments we won't be able to sustain market volatility and will end up making losses/sub-optimal profits.

While in market always remember that there are majorly 3 things which works in your favour (apart from sheer luck):

  1. Knowledge and solid research about your investments

  2. A well thought of entry and exit strategy, i.e. at what price I will buy and when will I sell (at what P/E ratio, price, profit %).

  3. Separation of logic from emotions like greed and fear.

Lastly, the objective for an investor should be to "maximise probability" of his/her success and aim to profit in "majority" of their investment decisions and not expect to profit in "all" decisions. Even with everything right, a stock can underperform due to external factors like strikes, new entrants, natural calamities, regulatory reasons etc. (things you can't for-see).

So please don't be very critical about your mistakes, always try to minimise your mistakes, learn from them and not repeat them. A good thing about stocks is that you don't need to be always right, even if your majority of the decisions are right, you will be in significant profits.

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