Are You A Thoughtless Investor?

Are You A Thoughtless Investor?

A thoughtless investor is someone who invests in something without performing any kind of due diligence first. I prefer the adjective “thoughtless” rather than “dumb” because the latter implies a lack of intelligence. Thoughtless investors can be highly intelligent but simply may not have the time or skills to do the work necessary to determine an investment’s risk/return profile and whether or not it makes sense for their particular financial situation and goals. Usually those who skip the due diligence end up relying on others for advice. If it’s a CFP® professional, I’m pretty confident – based on my knowledge of the training involved – that the investor is likely to be fine. I’m less sanguine when it’s a friend or relative offering the advice (especially when unsolicited), and least of all when it’s from a social medial platform such as Reddit.

What brought this on? My growing concern with extremely illogical valuations of esoteric investments such as Dogecoin. This one was allegedly started as a joke (see https://www.marketwatch.com/story/the-cryptocurrency-dogecoin-began-as-a-joke-and-now-its-worth-more-than-ford-11618923488) and has now accumulated over fifty billion dollars. That’s a lot of real money currently being thrown at an investment that is difficult if not impossible to value, much of it by younger investors who have no history with nor understanding of basic investment concepts. The consequences can be painful. I speak from experience.

When I was in my twenties I was a thoughtless investor. “Clueless” might actually be a better term. On the advice of a friend I had started following a popular newsletter author at the time named Joe Granville. He was a technical analyst who claimed to be able to read signals and predict market turns. He was also an entertainer who spoke vehemently and dramatically (somewhat like Jim Cramer today). At a live presentation I once attended I remember him frequently calling anyone not following his advice a “bagholder.” We would all laugh as if it were a kind of punch line to his routines. His newsletter was so influential that once after he sent out a “sell” message by phone to his subscribers, so many of them sold stocks the next day that the entire market dropped.  

One time Granville announced that General Motors’ stock price would increase by something like 10% within the next eight weeks. I literally put all my savings into GM call options (which leverage the money you can make when the stock price goes up). In those days there was no online trading; instructions to brokers had to be given by phone. My broker tried to warn me about the risk, especially the fact that you can lose everything when options expire, and I did end up taking some money off the table. But when the options did expire worthless – because the stock price had actually gone in the opposite direction of Granville’s prediction – I had ended up losing about half my money.

Although the loss stung acutely at the time, in hindsight it was a valuable lesson in that it started me on the path of education regarding capital market investing, and ultimately to where I am today. It also wasn’t overly expensive because I hadn’t yet accumulated a lot of savings. But the risk is much greater for inexperienced investors these days using platforms like Robinhood that make it easy to day-trade extremely speculative investments. If you can be lucky enough to buy something like Dogecoin right before it jumps 400% in a week, you can also be unlucky enough to be holding it when it falls 800%. And you could be gaining or losing hundreds of thousands of dollars in the process. The worst outcome in my view would be if a negative experience scared away someone from investing at all.

If you are new to investing and are fortunate enough to have a parent or relative who works with a CFP®, ask if the advisor would be willing to educate you on investment basics. We do this all the time with our clients’ adult children and I’m sure most others would also be happy to do so. If you’re on your own, find an unbiased source of educational advice such as FINRA’s online investment classes (https://www.finra.org/investors/learn-to-invest). Capital market investing is one of the most effective ways of growing your savings for your future needs, but only if you don’t do it thoughtlessly.

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