There was an article in the Wall Street Journal this morning about people getting their investing advice on Twitter. It is an interesting article, but a completely asinine idea for any investor to be getting their investing advice on Twitter. You’ll lose your money if you do.
Talking stocks is always sexy. Even when you don’t know what you’re doing, you can easily sound like the richest guy in the room. Now, this totally crazy past time has made its way to social media and it is going to cost people lots of money.
Most small time investors have either money or time, but not both. The first group of people are typically working a 9 to 5 job and trying to manage their personal wealth at the same time. The other group is people with no real wealth who want to get rich quick. I understand why people would get investing advice on Twitter, but you need to be smart about it.
Here are a few rules to keeping yourself safe as a small time investor.
1. NEVER buy stock advice – If the people who are selling you stock advice really knew what they were doing, they wouldn’t need to sell you anything. If they were any good at picking stocks, they’d start a low fee fund and make their money on the carry.
2. Avoid frictional costs – A few common examples of frictional costs are management fees, subscriptions, and brokerage fees. These all take away from your profits. Getting investing advice on Twitter is free, but many of the people will want you to buy their “premium” picks. That’s just an unneccessary frictional cost.
3. Bet long – Studies have shown that long term investing beats day trading hands down. This is a great article that compares both, you can decide for yourself. There are fewer frictional costs and volatility is reduced, yielding you a higher overall return.
4. Don’t follow the noise – The main subject of the article referenced above is Justin Pulitzer. As of the writing of this post, he has posted investing advice on Twitter 72 times in the last 24 hours. In the world of investing, less noise is always best. Small time investors should never have more than 8 to 10 stocks.
5. A stock is not a person – If you think you might want to invest in Tesla (TSLA) start by reading their annual 10k. Never invest in a company because someone has personified a company’s stock. A stock represents ownership in the company and has no way of controlling it’s own action. If someone tweets the following investing advice on Twitter; “TSLA is making an uphill run and she’s going to go through the roof” just ignore it for your own sake. TSLA is not a person and has no control over where “she” is going.
6. Buy the business, not the chatter – People like me pray on people who trade on chatter. If Blue Bell Ice Cream were a publicly traded company, I’d be looking to buy soon. This recall will have negative impact on a great business, creating a valuable position for entry. When Warren Buffett first went long on American Express, the stock had been nailed by the “salad oil crisis.” He went to local restaurants and saw people still using their Amex cards.
The point is, buy the business and ignore everything else. If you’re getting your investing advice on Twitter, you’d be best off to only use it to help you find ideas, then conduct ALL the research yourself.