The Virtuous Investor: Rule 19
Be an example – What would others think of your behaviour?
This post is part of a series on The Virtuous Investor. For an overview of the series and links to the other parts, click here.
“Think with thyself: Shall I unmindful of mine original beginning from whence I came […] for so small a morsel of feigned and false pleasure, unkindly depart from so noble […] a father?”
Erasmus of Rotterdam
This is the first edition of the virtuous investor series in the year 2020 so it might be a good idea to use it to suggest a new year’s resolution: Stop giving stock tips.
One of the things that annoy me is that so many private investors think they have to recommend stocks of a specific company to their friends and family because they have made a lot of money with them or because they think they are going to make a lot of money with it. Similarly, one of the most annoying questions an investor can ask me at a party is what stocks I recommend. When I get asked this question I typically respond with a long list of questions about their financial goals, their existing portfolio, their cash flow needs, etc. At the latest after the third question they typically make a lame excuse and leave me alone. And guess what? Afterward, both of us are glad the conversation is over.
The problem is that no investment can be evaluated in isolation. It has to fit into the existing portfolio of an investor, it has to fit her goals and her willingness and ability to take risks. The task of evaluating risk aversion and risk capacity alone is a major undertaking and a couple of years ago I have edited a free book that provides some guidance on the best thinking in the area for investment advisers. Risk depends very much on the circumstances of the investor. To see this, take a look at the picture of the woman below.
Can you see the terror and fear in her face? Can you sympathize with her anguish? What do you think has caused her to scream? What would you recommend her to do?
Now, let’s put this picture into a broader context and (literally) zoom out. At the end of this post, you will find the full picture of the screaming woman. It isn’t a woman experiencing fear or anguish. It is Serena Williams winning the US Open in 2008. And what appears like fear and anguish in the picture above is, in fact, joy and happiness. Circumstances matter as Lisa Feldman Barrett has shown in her excellent book How Emotions are Made from which this example is adapted.
When we give stock tips without knowing the bigger picture of an investor’s circumstances, we risk giving tips that are completely inappropriate because they may be too risky, or not diversified enough. The situation is clearly different if you are a sell-side analyst or broker and your clients are professional investors because these guys (hopefully) know, what fits into their portfolio and what risks they can take, but if you dispense investment tips to individual investors without knowing their circumstances and goals, you are being reckless. If you do that while being subject to the fiduciary duty rule (e.g. you are a regulated adviser or a CFA or CFP charter holder), you are running afoul of your professional duties. In my view, it doesn’t matter if you dispense stock tips at a party to some stranger who just learned you are an adviser or in your company’s meeting rooms when meeting a client. What would you think of a doctor you meet at a party who looks at a mole on your body and tells you that this is probably cancer? What would you think of the doctor if he is a GP and not a specialist skin doctor? It looks reckless and irresponsible and I for one would not want to have such a person as my doctor.
Worse still, if you are not a professional and dispense stock tips to your neighbours and family, you are making an even bigger mistake. You act like someone who has read about cancer on the internet and now provides tips to other people about this new miracle cure for cancer based on vegetable juice and tea. And if you think this is crazy then have a look at the Wikipedia page that lists this and many more miracle cures for cancer that are promoted to unwitting people in need for real treatment.
I know that social norms of compassion make us want to give advice to people without full knowledge of their circumstances. It makes us feel good and signals that we care about them. But just like quack therapies for cancer can make things worse because the patient refuses traditional scientific treatment until it may be too late, so too can stock tips prevent an investor from getting proper advice and a comprehensive financial plan set up – with potentially equally bad outcomes for their financial wealth.