Recently, the stock price of the company I work for fell by around 25% in one day. In fact, over the last year it has fallen by almost 60%. It hit me a bit because we receive a good proportion of our compensation as company stock. I lost a ton of money that day. Not because I sold it at this beaten down price but it will need to recover by 150% to get back to previous levels.
However, psychologically, it was not extremely painful for me for three reasons. Firstly, it was not surprising that the stock price fell. Everyone in the market knew that currently the company is struggling. Secondly, I recently sold off around 40% of my holdings in the company to invest in a better opportunity. Lastly, the fall in the stock price had less than 3% effect on my net worth.
But then just a few days later, I met an old friend & colleague for dinner. Naturally, the topic came up and I finally felt the pinch. Why?
He casually mentioned that back in 2023, I had advised him to hold onto this stock as it was at an all time low. He lost around 60% since he considered selling it. But he didn’t sell BECAUSE OF MY ADVISE.
It wasn’t that my advise wasn’t rational. I had researched this company in depth. At the time, the management was trying to fix the situation. I had also gone through company’s annual reports, quarterly call transcripts, and also researched competitors. It clearly looked on the path of recovery. I felt like I had covered all the bases, before recommending him to hold.
Then the situation slowly changed, new market factors came into play. I started doubting my analysis, considered selling, and ended up selling 40% of my holding. But I forgot to tell him that my opinion on the business has changed. Why? Because I didn’t even remember giving him the advise to hold the stock in the first place.
I should never have given him that advice. For several reasons:
- I didn’t know his entire financial picture, and his ability to withstand the loss.
- I didn’t know if he had any other semiconductor bets that increase correlation with this stock, and therefore increase the risk.
- I didn’t know if he planned to hold it for weeks, months, years, or to infinity.
- Market situation can change, like it did this time, and can change the probability of expected outcome.
Therefore, never again. At least never before knowing their financial standing, and their capacity, and ability of take risks. And I know, I am not the only dumb soul out there. There are many like me, who keep passing on recommendations without considering the outcome, without considering the impact it can have on one’s life, and without considering the simple fact that you could be wrong.
So if you are like me, who doesn’t mind casually passing on recommendations & advises, please don’t. Your intentions might be pure but outcomes could be brutal.
And if you are on the other side, receiving the financial advise. Please consider it with a grain a salt. Even if the person providing advise is a professional. Even if that professional is called Warren Buffet. Can you imagine buying airline stocks before pandemic on Warren’s advise, only to find out that he sold out each airlines immediately after the pandemic started. This example illustrates the importance of careful consideration in financial advice, which brings me to my final point:
Who should you take advise from?
- From someone who knows about your financial situation and risk appetite before providing the advice.
- From someone who has a good track record of helping people.
- From someone who doesn’t have a vested interest in outcome in that investment in either direction.
Especially, if you are new to investing with limited education, and experience.
In conclusion, let this be a cautionary tale for both advisors and advisees. If you’re like me, prone to offering free advice, remember to tread carefully, seek diverse perspectives, and consider the recipient’s unique circumstances before sharing your insights. And if you’re seeking financial guidance, be diligent in selecting an advisor who truly understands your needs and risk tolerance.
If you learned something from this mistake of mine, you definitely learn from other mistakes of mine that I committed over the last few years:
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