A Look at Bad Investing Advice That's Shockingly Common | 7investing
7investing

A Look at Bad Investing Advice That’s Shockingly Common

April 27, 2021

“If the share price doubles, sell your original stake and play with house money.” That’s terrible advice. You might as well tell people to “sell your winners even though you believe they still have strong upside,’ but it’s shockingly common.

In fact, it sometimes you feel like you hear bad investing advice on TV, on the internet, and in real life more often than you hear good investing advice. Dan Kline and Maxx Chatsko break down some of the bad advice you’ve heard (and shared with us on Twitter) on the April 26 edition of 7investing Now. We also explain why some very common advice — things many people take as gospel — is actually dangerous for your portfolio.

A full transcript follows the video.

 

Dan Kline: But Maxx Chatsko, let’s start with your pick for what is the worst investing advice you hear given out regularly. And I’ll share mine quickly to give you time to think if you haven’t prepped this one. People always talk about taking money off the table, like you know, your winner doubles will take your original investment off, and we’re going to talk about this in depth more. But to me, that is the single dumbest thing you could do because you’re robbing yourself the ability to make more money. It’s all your money. It isn’t house money, that is not a thing. But, Maxx Chatsko, what is the worst common investing advice you hear that you would love to share with people that shouldn’t be following, of course.

Maxx Chatsko: It sounds counterintuitive, but I hate when — like this happens all the time, right, on social media? Someone will have like a 15 tweet thread about some stock that they’re interested in. And then at the end, as if it’s like, “Hey, don’t listen to me if this goes off the rails,” they say, “hey, as always do your own due diligence, like do your own research.” And like yeah, but the problem is most people don’t know how to do their own research.

Or they think like following some guy on on social media, or Reddit or wherever it is like, you know, the guy at the barber shop, like, that’s not necessarily research, you need to do a lot more than that. So do your own diligence. I hate when people say that, because it’s like, “Hey, you know, I might be wrong, but, you know, don’t blame me. It’s just, it’s just too easy.”

Dan Kline: Yeah, and here’s the thing, be really careful whose advice you follow. So I see a lot of people on Twitter who may be good investors, sharing their portfolio sharing their picks. Now, if that’s someone who is well accredited in a space, like say, our mutual friend, Todd Campbell, you might want to use that as a jumping off point for your own research. But there’s a lot of people out there that might be investing – and over the past year, they might have done well. You know, who’s done well, the past year?

Everyone, everyone has done well. And a lot of bad things have happened. My contractor friend who did my work at the house told me that a few years ago, he bought $7,500 worth of Dogecoin not knowing what it is, forgot about it, and then a few months ago, sold it for $80,000. But he fully understands that he did something dumb that happened to pay off. And now he’s being really diligent about what he does with that $80,000.

He’s going to buy a home and he doesn’t own a home so that’s a giant win for him. But again, we’ve talked about this analogy a lot. If you go to the casino, throw your money down on a roulette wheel and it happens to come up big – it’s not because you’re good at roulette, it’s because you got lucky. You’re not going to win again. And look, I don’t buy speculative things for the most part and when you go with what we talk about at 7Investing, you’re getting people whose credentials you could research.

You can look up and find out, you know that I’ve spent eight years in this space doing my homework. You can see that Max has an advanced degree and has been in his space on all ends of it. You’ll find out that you know, from a retail point of view, I’ve run stores from a warehousing and logistics point of view. I delivered rental scaffolding and had to deal with all the logistics. I’ve bought commodities. My credentials matter.

And the reality is a lot of the people throwing advice out there, their’s don’t. We would love your questions. We would love your comments. Sam we’re going to share Andrew Connelly’s comments because at least one person enjoyed my opening comments. “Considering I bought a home September 1 I personally find it extremely relevant haha,”

Yeah, we’ll do a show on buying a home. Maybe that’ll be a podcast at some point because I’ve bought and sold more homes than any person I know who isn’t like a home flipper. And here’s the reality you learn things every time. There’s things I now know like when I first bought a home, it never occurred to me to run all the sinks and flush all the toilets. And the first house we bought had massive plumbing problems and we actually sold it because eventually the plumbing was going to collapse. It didn’t have a basement. The plumbing was laminated cardboard tubes underground from the 50s that was eventually just going to go caput and to fix it they would have to dig up my living room. That was more hassle than I wanted.

Maxx Chatsko: Dan, my favorite story of yours is the the pipe the turn to dust when you touched it.

Dan Kline: Oh, that was amazing. We lived in Simsbury, Connecticut, in a house from the 1800s. It was a beautiful house, but it literally had exterior plumbing, like you could see the pipes. And one day I just touched a pipe and it just went poof. Now you can’t buy that level of copper pipe anymore. But thankfully, it was not particularly difficult because it was exterior to replace it. So that was not an expensive thing.

And a piece of advice I’ll give everyone: find a contractor or handyman you like and become actual friends. My friend who did the work is a legitimate friend, someone I hang out with and have dinner with and it saves you a ton of money. Plus you have another friend, that’s always a good thing.

But we are going to talk things you shared with us on Twitter, we’re going to stay in the housing space. Sam, if you have these, you’re welcome to share them if you do not not a problem, because I don’t think I told you beforehand. Lumber trader guy says, “always have a house payment,” Sam Bailey way ahead of me, as always, “always have a house payment so you can deduct the interest on your taxes.” There’s a lot of flaws in this. I can explain some flaws. But Maxx, you don’t own a home. If you buy a home, would it be so you can deduct the interest on your taxes?

Maxx Chatsko: No, this reminds me of that saying, “You’re spending dollars and saving pennies,” kind of thing? I mean, what is it like I donate to a certain type of fund and I can write off that on my state taxes but like I have to donate, you know, $1,000 will save me $30 in taxes. So it’s like, well, you know, what’s the what’s the point of that?

Dan Kline: So when you buy a home, being able to deduct your your interest is a nice benefit. The rules have changed about that. I’m not sure it applies to everyone. I think there’s a $10,000 limit now I’m not even sure because you buy a home not as an investment. Now should you buy a home in an area you expect home prices to collapse? Of course not. You want to be careful to buy something that is likely to retain or gain value. But that’s not why you’re buying a home. You’re buying a home to live in.

And when you look at buying a home, you want to look at the delta of what renting what you would like to live in versus owning what you would like to live in costs. And right now, where Maxx is and where I am, renting the home I’m in right now cost me about $2500 a month, it cost me $2,495. So almost exactly $2,500 a month. If I wanted to buy this home in a very inflated market, my mortgage plus HOA would be not a lot more than that, it’ll probably be about like $3,200 a month, excuse me, that’s a pretty significant gap.

Meaning, to make back the money I would gain by owning when I sell the value would have to climb by about $8,500 a year. That is not necessarily likely. Now you can also factor out that you get the benefit of living there. So if you really want to live someplace for a long time, you can still do that when the delta is a little bit negative. But you don’t want to do it when the numbers really, really don’t make sense. And right now, Maxx, you’ve been you’ve been looking a little the numbers don’t make sense, right?

Maxx Chatsko: Yeah. And Pittsburgh we’re one of the last major cities, if you want to call Pittsburgh a major city, that has a favorable real estate market. But I mean, a lot of places like here, it doesn’t make sense to just rent. I don’t know. I mean, you could still – it goes either way. But yeah, we’ve had a pretty big surge in home prices recently, in the last 12 months or so. So, I’m gonna keep renting Dan.

Dan Kline;CYeah, it’s been a very insane, you know, we’re looking to buy an investment property and the prices are up and they’re selling around asking price, a little over, sight unseen within 24 hours. So we’re under contract with a buyer who’s been approved for a mortgage, we’re going to close in a couple of weeks. And we can’t even make contingent offers, which normally a contingent offer with our situation will be considered a cash offer will be considered strong. Now, there are so many cash offers, there is no point in us making bids until we have cash in hand.

So don’t look at your home as an investment unless you truly know real estate, or are handy in a way that you can add value to them. Sure, if you redo a home over three years while you live there, and then can sell it for more money, maybe you’ll end up living rent free and make a profit. That can be beneficial. But as someone who can’t change a light bulb or paint a wall, that is not going to work for me.

We would love your questions and comments, we see some we’re going to take them as we go. Eugene Ng shared a whole bunch of them, I’m just going to throw one of them out there. “Don’t buy as market is at all time highs.” Maxx, recent history has proven this one to be fully not true.

Maxx Chatsko: Yeah. And if you zoom out, I mean, you know, the markets kind of always at all time highs, right? Like, if you go back the last decades. We’ve talked about this with any specific stock, look at Apple stock, it goes up all the time, or you know, it’s had a very good run. So if you look at the historical stock chart, it’s hit a lot of all time highs, because every day, maybe it hits another all time high for a good time, you know?

Dan Kline: All time highs don’t matter. If you look at good companies, they’re going to hit their all time highs. And if you wait for a recession to buy, you don’t know how much you lost. Now, there might be volatility. So if you buy at an all time high, and then there’s some bad news and the market drops by 20%. That only matters if you’re a short term holder. Let’s take the question from Pascal shared live that sort of plays into this. Thank you for bringing that up, Sam. “Hi, guys. worst advice: This stock very cheap so there is no risk.”

I talked about this analogy a lot. “A day old bagel is a good deal.” You go you go to Einstein brothers or Panera, or whatever it is, they’re selling day old bagels, you got people coming over that afternoon, you’re going to put out bagels, no problem. Week old bagels don’t have the same value. Month old bagels don’t have any value. So sure, there are stocks, I could point out, Maxx, I’m sure you could find me some biotech stocks that have a really nice website, a pretty good brochure, maybe the CEO has some history or past or there’s like they’ve rented some white coats and have a really cool video, and the stock is trading at like eight cents. And I could buy, you know, 100,000 shares. Price doesn’t equal value. Is that fair to say?

Maxx Chatsko: Yeah, I see this a lot actually in biotech, you know, they might fail a clinical trial, and the stock gets whacked. And everyone’s like, “Wow, look, you know, it’s 50% off now. It’s trading at this much of cash.” And you’re like, yeah, it doesn’t have a pipeline anymore, or the next 10 years of clinical development are going to cost hundreds of millions of dollars this company doesn’t have. So it’s not cheap. And stock price, like you said, doesn’t really mean anything in terms of the long term potential.

Dan Kline: Yeah, and that doesn’t mean if there’s a company you really like, and something goes wrong, I’ll give the big example of Microsoft and Windows eight. If you fully believed in Microsoft and felt, yep, their stock is trading at depressed prices, because windows eight failed. And windows eight is the cornerstone of the Microsoft empire for the most part. But if you believe that they were going to recover, that might be a time to buy more Microsoft.

It’s not like good companies don’t see major share reductions for viable reason. So if there is a biotech company that has, you know, four things in the pipeline, and one of them fails, and that gives it stock price a hit, that doesn’t mean you don’t buy, but don’t buy solely based on price, like, you know, again, just because something was worth that doesn’t mean it ever has to get back to that. We appreciate your questions and comments, feel free to keep them coming,

Maxx Chatsko: Yeah, and just sticking back with the original comment of ‘don’t buy at all time highs,’ because I think that’s a little more relevant in today’s market, right? You know, we’ve talked about this a lot, but most of the time, what I do is I buy  positions over time. So I kind of accumulate positions.

So, one month it might be 10% higher then it might be 25% higher then it might be 7% lower, and it doesn’t matter over time you’re trying to build and grow into positions so don’t be scared of a price that seems like it’s the highest it’s ever been. Now, you can overpay for growth. So I mean you have to kind of think about long term too, if prices make sense but I think overall people who are too concerned with pricing are going to miss out more from not being in the market at all.

Dan Kline: Here’s the thing, the market is a long ride we’re going to take last so not right now. We’re going to take Zulfiqar’s comment as the last one when we segue out but we’re gonna get to a few more before that. Bradley Smith says, “I hear people say they are ‘long’ on stocks…one small pullback…and they are out. So the misuse of LONG.”

Yeah, we have this all the time. We are a buy and hold investing service we have not yet issued a sell. There are a couple of companies we’ve had long debates on what it might take to get us to sell. So it’s not something we don’t think about. But we don’t worry about short term volatility. I own five or six, maybe it’s up to seven of Maxx’s picks, I think it’s actually six. And I think they’re all underwater. I think every one of them isn’t making money yet. But here’s why. Because the reason Maxx told me to buy them hasn’t happened yet.

So it’s basically like if you’re betting on a baseball game, and the game hasn’t started yet, and you panic and sell your bet for less money to somebody else, that does not make sense. The volatility of a stock with a thesis hasn’t played out, doesn’t matter. So if Maxx is telling me to buy something because he believes they have three things in the pipeline, and if any of them hit, it will be a massive success, and my investment will be worth more, there is no reason to let short term news affect you. I understand it. People ask us, probably the thing we get asked most, “Why this is down X percent should I sell?”

I promised 7Investors, if you remember, and we truly believe it’s time to sell for good reasons or bad reasons. I gave my friend the example of GameStop. I knew people who before the crazy GameStop trading, owned GameStop, because they believed it was a fairly solid company with a good balance sheet that had the potential to double or triple over a few years, when it 80x’d because of speculators that played out their thesis they sold as fast as they possibly could, because they weren’t believing GameStop was going to become Apple or some magic company, they believed it had a path to retail viability and that made it a solid five year investment. When it played out that’s when you get out. That is a time we would issue a sell.

So let us talk. Wayne Forrest says, “”Dollar cost average” as your stock continues to plummet.” This is actually not cut and dry. So if your stock is plummeting, but you believe in the stock, I’m actually in favor of continuing to add to the stock Maxx, your thoughts there?

Maxx Chatsko: Yeah. And this goes back to the last question. You want to orient your thinking around the thesis. So if the stock price is going up, or the stock price is going down, if the thesis is intact, then it doesn’t matter, right? You still want to maybe buy or hold your position. You don’t want to sell and panic if it’s going down for no reason.

Like, Dan said, I think half of my picks are up half are down. But the nearest term milestone for any of my picks is still this summer from any pick I’ve ever made. So even with the ones that are up, there’s really no reason they should be up, but it’s a market, right? Stocks go up, stocks go down. So I’m not even concerned. And it takes time to play out some of these, especially the earlier stage biotech companies that I tend to focus on.

Dan Kline: John wayne says, “Go big or go home.” Yes, that is terrible advice. So when I buy into a company, like Maxx, I build a position over time. When I buy Maxx’s stocks, I usually buy $100 worth, and I add to them, especially when he re-recommends them. But I don’t necessarily feel the need to put $10,000 in or $1,000. I basically make them a small part of my portfolio. And if for some reason, they come up with news, and they quickly changed, well, that’s great, I’ll have made some money.

But go big or go home is this idea that you want to have quick returns, so you find one thing. That’s a lot like betting on sports where if I make three or four bets on games, I think I’m going to win, I might hit on two of them and come out roughly even or hit on three and win some money. If I put all my money in on one game, that’s a bad idea. I’ve done that. Matt Franco and I have definitely made some big bets, you know, but big bets.

I say like, we were gonna bet $300 for the night, we each put $300 into a pool bet $600 on something and I’d say in the long run, we’re probably slightly ahead. But that’s not a great strategy. It’s probably more fun from an entertainment point of view to have two or three games going on three or four games going on. That’s how I view the stock market. I want a lot of chances at a big price. Maxx, your thoughts here?

Maxx Chatsko: Yeah, absolutely. I mean I spread risk across my portfolio. And one of my recommendations, I was even like, Alright, I need to start having an anchor position to kind of offset some of the risks from my development stage companies. But yeah, I mean, you shouldn’t be all in on, we talked about this before, but allocation in your portfolio is important and just something you need to think about. What should your largest position be as a percentage of your portfolio? And that’s different for everybody, right? If you’re young, if you’re old if you’re near retirement. So just something that you have to think about as investor.

Dan Kline: We’re going to take two more comments from the twitterverse. Then we’re going to take Zulfiqar’s comments. When we get to the excellent interview with Anirban Mahanti. That one is taped. It’s really if you have kids, you should be watching it. If you’re thinking about kids, you probably should be watching it. Frankly, even if you’re married or in a long term, mixed finances relationship, you should be watching it but feel free while that’s playing to send us your questions whether we answer them now or save them for later.

Or just send us your comments We always love when you are interactive with the program even just saying hello can be fabulous. But Irritable investor, that is a great name. Irritable investor says, “Always use stop loss orders.” Maxx, you know, this might be my most hated piece of common financial advice. Would you care to explain people what happens when you use stop loss orders?

Maxx Chatsko: It’s really bad I don’t use them at all, I actually don’t even really know what they’re use, I guess it’s to limit your losses or something, right?

Dan Kline: It’s to accidentally sell out of a good position because it went down 10% or whatever the number is.

Maxx Chatsko: Do you remember, there was like a flash crash and a lot of people got caught in that with stop loss orders? Like if some stock went down like 60% for no reason, or the whole market, maybe whatever that was?

Dan Kline: A stock can move 20 or 30%, for really dumb reasons. And it can recover very quickly. If you have a stop loss order on Apple, maybe its set at 10%. Apple goes down 10% multiple times a year most years. So you end up sold out of Apple, you realize it the next morning and you’re going to buy back in and maybe you end up paying a premium over what you sold at. Very likely you pay a premium over what you sold at. This is not a great strategy. If you own a company have the conviction to own that company. You know, it does not make sense to let computers make trades for you.

Anand Khatri says, “Buy some gold as insurance of your portfolio. It doesn’t work out in my investing journey.” No. Gold should be for jewelry and teeth. It should not. It may be really fancy burgers. I know that was a trend for a while. I am not a fan of hedging with gold. My hedges on my portfolio are my cash position. I always try to have a 12 month emergency fund. My other hedge is that I’ve talked about we’re buying a vacation property we right now own a very modest vacation property that we own fully.

If my world went to hell, I could live there comfortably. I like it there and I own it fully. When we buy our resort property we’ll be trading up and I consider that my hedge against the end of the world where I own a nice place that I could live in if somehow I had to live there, that would be comfortable. I don’t believe in gold because gold is a market that makes no sense. It it doesn’t trace based on logic, you don’t know anything special about gold. You know, Maxx, I know you’re considering a gold grill. But aside from that, do you have any gold?

Maxx Chatsko: No, no I don’t have gold. You know, it’s one of the strangest investment arguments that is out there, right? People use it as like a hedge against inflation or this and that if you look at the long term, I mean, gold and precious metals are some of the worst performing assets you could possibly purchase. So like you said, I mean, use cash or you know what’s a great hedge against inflation? Stocks, like over the long run, right? I mean, that’s kind of how it works. So not not good advice. Don’t buy gold.