Why You Shouldn’t Trust Financial Writers

Part of my mission is to provide a contrast to some of the things you may see out there in financial marketing and financial media—or where those two converge, which is commentary and news. So how can you tell quality news versus news that has no usefulness at all?

Well, maybe an example will shed some light on it. One piece of investing “wisdom,” that tends to make the rounds is: “Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing.”

That sounds pretty sensational doesn’t it? That’s from an article a few years ago by Robert Kiyosaki, the New York Timesbestselling author of the Rich Dad, Poor Dad series. Diversification is easy and achievable by just about any investor, but if Kiyosaki is claiming that Warren Buffett, the most successful stock investor of all time, says that it is a bad idea, then what are you to do?

Perhaps the answer is to buy the author’s books, or his investing “kit,” or a weekend seminar, or even personal coaching – you get the idea. This pattern of writing sensational commentary represents a serious conflict of interest. I don’t mean to pick on Kiyosaki — there are many offenders and a quick internet search will show you how many other financial commentators are using the same model.

By the way; here are the facts about the example above:

The quote probably originates from a speech Buffett gave in 1998. While speaking to a group of MBA students at the University of Florida. Warren Buffett did make the comment above, however, it was prefaced with a qualifier that stated;

“I believe that 98 or 99%— maybe more than 99%— of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.”

The truth is that Warren Buffett’s own investment company, Berkshire Hathaway is very heavily diversified, with bonds, stocks, currencies, swaps and private companies.

Consider the Source

You don’t need to read everything. But if you find an author you find somewhat credible, then it’s worth your time to double-check his or her claims. Best case scenario, everything checks out and you have found a truly reputable source. Or you may just find out that the research is shoddy and that the claim is too good to be true. Either way you’ve done yourself a favor, and it hasn’t cost you anything.

Almost everyone in this business is selling something, and if their commentary is confusing, proprietary, or too good to be true, it is probably best to avoid whatever they are selling.

So even though trading is a fast-paced game — before you enter a position based on someone’s advice, there’s no time limit on researching it beforehand.