Don’t you love the guys/gals that get their investment advice from the water cooler? You know the guys and gals that are constantly hopping on the bandwagon of whatever terrible investment advice that their co-workers heard on the radio on the way in this morning?

“I watched Jim Cramer last night and he said that even though last week he hated this renewable energy stock, since it has went down 7% he is now in love with it, and at it’s current prices it is the best buying opportunity for this decade”

Everyone then nods their heads and positively affirms how smart everyone else is in the group. Now I often do this simply because it gets really socially awkward when you tell someone that they should probably just light their money on fire as do what they are proposing. If you tell someone that their vaunted financial expertise is exactly the sort of thing that the financial sector preys on, they tend to want to ostracize you. However, after I am done giving my false contribution to group dynamics it would never enter my mind to act on the advice, and yet countless others do.

investing fadThere are actually some fairly straightforward reasons why this style of investing is more harmful than most. By trying to jump on the latest investing fad that your buddies heard about through the most recent mainstream media, you are almost guaranteed to buy at a market top, and then if you are like most investors you will panic when the investment starts to cycle downwards and likely sell at a very bad time. In other words you will do the exact opposite of buy low, sell high. The rationale behind this claim is that by the time most people around the average office water cooler (obviously if you work on Bay Street or Wall Street your water cooler is a little different… for starters it’s probably gold plated) it has made its rounds on the various media circuits. The real investors, the hardcore traders, and hedge fund managers have already been in and made their money. By the time the media reports on an investing movement, almost always the majority of the bull run has taken place and now they are just encouraging speculation. Speculation is when people purchase an asset not because they think it has good value, but because they believe the price will continue to go up and they can sell it for a profit. That in a nutshell is how bubbles happen, and why so many people can’t figure out why their investment returns most years.

Before you take someone else’s investment advice, I advise you to take a look at how the average person does picking stocks. If you’re in a hurry, I’ll save you the trouble, the vast majority of investors, no matter the geographical location or asset class will severely underperform the overall returns of their index. In other words, if they just bought ETFs or index funds they would be far better off. As a general rule, when Glenn Beck begins to pitch your asset class (hey gold lovers out there – that’s you!) it’s time to sell and run for cover.

The really interesting thing is that the guys out there that actually do make a ton of money in the stock market and experience above average returns, do so at the expense of the water cooler/investing fad types. Warren Buffet is famous for saying, “You pay a very high price in the stock market for a cheery consensus.” His philosophy revolves around investing in companies when there is proverbial blood in the streets. When everyone else panics, he simply wades in and buys companies at depressed prices because of all the volume that is suddenly on the market. There are other lesser-known investors out there who make pretty decent returns most years by simply doing the opposite of whatever most people are doing. This is called the contrarian investing style, and it would be interesting to try (if I wasn’t an ETF convert). Maybe I’ll do a test in the future by simply turning on the investment shows at night and buying whatever is the opposite of what there are saying. I’m fairly certain that strategy would outperform the average investor.

Don’t let the fancy production levels and talking heads convince you the latest investment fad is the ticket, or that this downward cycle is different than all the others and you need to sell now. Simply have faith that capitalism and entrepreneurship will continue to drive money towards businesses that can get you a decent return on it. The world is still growing by leaps and bounds, simply investing money in the market average and leaving it alone is by far the best policy for most people. Unless you heard that tip on gold bullion last week… deal of the decade they say…