Dangerous Knowledge

When I browse the financial media, it makes me extremely grateful for my experience in the investment industry. It helps me to separate the good information from the bad.

Here is a particularly dangerous article, masquerading as solid wisdom. Without a lot more experience and knowledge it would be easy to read an article like this and take it to be truth.

http://finance.yahoo.com/news/cramer-many-stocks-too-many-222302476.html

The article basically says to hold about 10 “quality” stocks in your portfolio and do an hour of homework on each one per week.

Completely absurd and dangerous advice. First, 10 stocks isn’t sufficient diversification at all. But why does it recommend 10 stocks…? Because, it says, you need to do an hour of homework per stock each week, so more than 10 would be too much work. Sounds like sage advice — do your homework!

This brings me to my second point

The hour of homework recommendation is really dangerous.  It is just enough to give an individual investor a false sense of security. An hour of homework is in no way enough to give anyone at home an edge over the investment bankers, fund managers and other investors that throw massive resources at researching their trades (and even these investors are not successful at beating the market in numbers greater than you would expect by chance alone).

However, one hour per week is enough to waste  a substantial portion of precious time and give the investor the feeling that they have the expertise to make successful trades. This false sense of empowerment can lead to some very dangerous financial decisions.

A little knowledge is a dangerous thing.

I cringe when I think about the inheritors out there that are being peppered with articles like this. It really makes it hard to tell the good information from the bad.

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