If you tell people that you play the market, they’re likely to respond in one of two ways – either they want you to give them investment advice, or they think that they’re experts and they want to give you investment advice.
Today, investment advice is everywhere, but investors should beware – free investment advice is usually worth exactly what you pay for it – nothing!
Using a Stock Broker for Investment Advice
All too often, stock brokers are trained salespeople, more so than trained financial professionals. Before you act on any investment advice from a stock broker, make sure you understand how the broker is paid. Do you pay him a fee specifically to give you investment advice?
If so, does he have any other incentives to advise you to buy a certain stock or financial product? Stock brokers are legally required to disclose any conflicts of interest when giving investment advice, so make sure you ask.
Or, if you’re not paying your broker specifically for investment advice, you need to ask him if he receives a higher commission from the product he’s recommending you buy than from other, comparable products.
Using CNBC for Investment Advice
CNBC is a 24-hour business news channel, and throughout the course of day, dozens of stock market pundits appear on screen to give investment advice. To disclose all possible conflicts of interest, CNBC displays an on-screen graphic detailing if the pundit owns any of the investments he’s advising you buy, or if his family or firm do.
However, the biggest risk in using CNBC for recommendations is that much of the investment advice is distilled into minute sound bytes. This results in an incomplete picture, in which you may not fully understand the pros and cons of a given stock or other investment vehicle.
Using Magazines for Investment Advice
There are numerous magazines that dispense investment advice. The best among them are probably SmartMoney and Forbes.
SmartMoney is geared towards somewhat less sophisticated investors, however, Wall Street pros can read and enjoy the publication without it insulting their intelligence. The good news is that SmartMoney offers in-depth profiles of many stocks and other investments in each issue.
It is also faithfully honest about its best and worst picks, and it routinely reviews how its investment selections have performed over the past year.
Forbes is slightly different type of publication, with a somewhat more affluent and conservative audience. While SmartMoney is geared towards upper middle class investors with a few hundred grand in their 401k’s, Forbes is more for the executive-level investor with a few hundred grand in annual contributions to the Republican Party.
This does not mean, however, that Forbes is not a good publication. It does devote a full 1/3 of its pages to investment advice, and while its investments articles are not as in-depth as SmartMoney’s, they are well-written and concise – and sometimes that’s just as good.
Using the Internet for Investment Advice
There are numerous online sources of investment advice. Yahoo! Finance publishes articles and relays analyst opinion. TheStreet.com has many premium products that give comprehensive recommendations. But easily the most famous website for investment advice is MorningStar (morningstar.com).
MorningStar is best known for its mutual fund reviews, but it also publishes research reports on individual stocks. However, MorningStar has come under increased pressure lately as many of its picks have failed to pan out.
MorningStar assigns stocks ratings of one to five stars, and critics charge that the company will give a bad stock a good rating, and then as the share price falls, MorningStar upgrades the stock – saying it’s fallen too far and is now a great bargain.
The problem? The stock sometimes continues to fall. In the case of certain stocks like Microsoft (MSFT) and eBay (EBAY), MorningStar may soon have to create a sixth star to give them as they continue to plummet in value.
The message is – beware of all investment advice. Get your recommendations from multiple sources, always check the advisor’s track record, and be wary of any potential conflicts of interest. And the next time your brother-in-law tries to give you some investment advice, refer back to the first paragraph of this article.