Most Common Investing Mistakes – Part 4 (Relying on Other People’s Opinions)

Below is a piece of advice I was fortunate to be the recipient of that had a major impact on my investing results. I want to share this with you because I’m convinced you’ll benefit tremendously.

The more you rely on other people’s opinion, the less you know.
The more you know, the less you need to rely on other people’s opinions.

At first glance, it seems rather simple and straightforward, even obvious. But if you take the time to think about it for a moment, you will discover a powerful underlying message, a message that separates successful investors from the rest.

Below is a conversation I recently heard from friends of mine (the names have been changed):

Gary: “Sara, listen to this. My boss told me today he made a killing on the stock market. He put in $10,000 in this one stock and it went up by 20% the following week! He made $2,000 in one week! Man, he made it look so easy.”

Sara: “Whoa, that’s a lot of money! Did he tell you which stock he bought?”

Gary: “Huh…no, not really, wait hold on, he did mention the name of the company. I can probably look up the stock symbol. Do you think I should buy it?”

Sara: “That’s a no-brainer! Don’t wait or it’ll be too late. We got a get in on the action. Buy some shares first thing in the morning tomorrow. How much can you buy? I can transfer some money from my savings account.”

Unfortunately, this scenario occurs too often. It happened during the Internet mania and it’s happening now as more and more individual investors are taking investing decisions into their own hands after a harrowing market downturn. There’s a growing feeling of disenchantment toward financial advisors that is creating this new wave of DIY investors.

When investors are not taking cues from their co-workers, neighbours or even cab drivers, they follow recommendations given by “experts” on popular business shows on CNBC, BNN and even PBS (Nightly Business Report).

Now whether you are influenced by your co-worker and buy a commodity stock, are convinced by your father-in-law and buy a biotech start-up or listen to a “market strategist” on CNBC and buy a sector ETF, you are making an investment decision based on someone else’s opinion.

This can only mean one thing: you relied on someone else’s opinion because you were not an informed investor. If you consistently undertake actions without proper knowledge, there’s a high probability you will get burned sooner or later.

Similarly, if you don’t know much about renovations and hire just any contractor, there’s a possibility you could be taken for a ride (you might need to call Mike Holmes).

But if you know about renovations or at least do some research to find out about a contractor’s license, what permits you need, how much materials cost and get several quotes, the chance of a contractor taking advantage of you is much less.

When it comes to your personal finance and investment portfolio, it’s no different. The more you know the basics of different investment vehicles such as stocks, mutual funds, ETFs and bonds, the less likely your financial advisor can misguide you towards high-commission products for their own benefit.

The more you learn about investing, the more personal power you have. The power I’m referring to here is not the kind of power that people in Washington lusts for. I’m referring to the power that emerges from within as you learn, grow and take control over your financial destiny.

Indeed, knowledge is power. But knowledge can only be converted into power if you act upon it. Act upon your knowledge, not upon other people’s opinion and you will reap the financial rewards.

If you have limited investment knowledge, start with low-cost index funds or ETFs. As your knowledge bank grows, you can start buying stocks directly.

Here at The Smart Canadian Investor, our mission is to educate our readers and raise their level of investment knowledge every day. That’s why we created a Resource Center to house useful tools (i.e. Morningstar's online classroom), links and recommended books so that we can help individual investors succeed. We encourage you to take a tour today.