Taking advice

If you’ve read any of my books you’ll know that I urge readers to take control of their own financial destinies and not rely on others to set up or manage their share portfolio. You might think the reason I do this is because my books aim to educate readers so they feel confident enough to make good share investing decisions and not rely on ‘experts’. In fact, I decided to take control of my financial destiny after the numerous occasions when I took advice which turned out to be counter-productive. Put less politely, the advice was usually bad and I lost money following it.

As a novice share investor you’ll be tempted to act on advice because like I did at the time you’ll most likely assume:

1. Those giving advice have greater knowledge of share investing than I have.
2. The more somebody knows about shares and the greater their experience, the more likely it is that they’ll be able to make good decisions about shares.
3. My share investing will be more profitable if I follow expert advice.

Analysing these assumptions with my current knowledge and experience about shares, the first assumption – that the person giving advice knew more about shares than I did, was certainly correct at the time. With every new endeavour a person follows what is widely known as the learning curve. It looks like this:

At first you don’t have much ability but as you learn and gain experience your ability grows at an increasing rate but eventually flattens out as you reach your level of competence – that is the maximum performance level you’re going to achieve. Applied to shares, it means that a person with more experience and knowledge is certainly more likely to have a higher competence level.

Looking at the next assumption, does it follow that having more experience and knowledge about shares will lead to better decisions and more profitable share investing? I think that’s true – if it wasn’t there’d be no point reading my books or learning about shares. But my experience has convinced me it’s true only up to a point. You need to know enough about shares to be able to understand the jargon, interpret the available information and be able to trade shares successfully. You should also know key strategies to improve your likelihood of success and avoid pitfalls you could unknowingly stumble into.

The problem is that success with shares involves looking into the future and how the sharemarket will react in future situations is notoriously difficult to predict with any certainty. I’m convinced that no investment advisor, computer program, rule or system works consistently well in all sharemarket situations. What might work well in one situation might result in disaster in another.

So what can we take out of all that? If you’re a novice share investor you should certainly start climbing the learning curve and learn what you need to know about shares. When you reach a good level of knowledge and experience you should develop confidence and be able to trust yourself.

Don’t get me wrong – I’m not saying you should ignore all financial advice. On the contrary, I seek all the information and advice I can get that’s free – and nowadays there’s heaps of it you can tap into. But don’t act on any recommendation without first putting it through ‘the grist of the mill of your mind.’ After you’ve done that and conclude the advice has merit – by all means act on it but don’t act blindly.