"Not Financial Advice"

Handling requests for advice from friends and family

As an active investor passionate about researching companies and observing markets I think it’s not arrogant to suggest that I know more about investing than the ‘average’ person. At this point, I have dedicated years of my life to educating myself further through experience, literature, and the act of simply reading thousands of transcripts and filings.

Note I emphasise the term ‘average’ person. The average person has never read a 10-Q in their life, doesn’t appreciate the nuance of a footnote, doesn’t know what a discount or risk-free rate is, and probably has a limited understanding of what it means to own shares in a company. So in this context, it’s a pretty short hurdle. As it relates to my knowledge relative to the average investor— I am not making any such claim.

You like stocks, what ones should I buy?

For anyone in a similar boat, and I am assuming this relates to most of my readership, you have likely experienced, perhaps on several occasions, a friend or family member asking for your opinion or advice on the broad umbrella of finance and/or investing.

To the average person, when you work in finance or are known to have an interest in the area of investing, it doesn’t matter whether you work as a bank teller, an economist, in a fund, as an analyst, or are simply an individual investor. To them, you work or are interested in “finance” so you must know about everything from the price of wheat to the geopolitical trade tensions of the times, to what stocks to buy.

The nature of the questions can vary, ranging from advice on saving and personal finance to asking whether the price of a publicly traded security is a “buy or sell” at a given time. Other times it may be open-ended— “What stocks should I buy right now?”. In some cases it may be an inquisition into your thoughts on a matter— “what is going on with the US tariff situation?”. It may be a request for an understanding of basic concepts like “How do I buy stocks?” or “What is an ETF?”.

Advising friends and family is a lose-lose scenario

As a general rule, I view all such questions as a loaded gun. On the one hand, you presumably love or have affection for these people. Being educated about finance and investing is a marvellous thing, and to help someone along that curve instinctively feels good.

On the other hand, it can commonly be a lose-lose situation. Here are a few thoughts on why:

1. You are not a financial advisor, and advising on matters in which you are not qualified can be problematic¹.

2. You don’t, and will likely never, understand the full nuance of a friend or family member’s financial situation, their risk tolerance, their goals, and so forth. What is right for you, is unlikely to be right for them.

3. You don’t have the time to continually update them on the changing landscape.

4. You don’t have time to update them with your thoughts on individual stocks as they change.

5. The outcome of anything you advise them to do will be attributed to you.

6. You are encouraging a reliance on advice instead of encouraging them to pursue their own path of education. They should learn to make these decisions for themself, and be accountable to themself.

7. The average person will typically not pursue a path where they are dedicated to furthering their understanding of investing beyond a certain point. I will discuss this more shortly.

8. Investing in single securities is hard, and to be frank your advice might be lousy.

This list is non-exhaustive, to say the least. So what is the solution? Add a suffix at the end of every sentence “Oh and by this way, this is not financial advice”?

A few years ago I was having drinks at a bar with some colleagues I used to work with. They work in finance and are what I’d refer to as casual observers— more knowledgable than the average person, but not dedicated in the sense they read filings or follow individual companies closely. The topic of conversation often shifts to investing. One evening I briefly described a few companies I liked and the reasons why. While not a serious conversation, and one that was said in passing, I had focussed on why I like them as businesses. I had not commented at any time about whether or not they were attractive stocks— other than saying something to the effect of “at the right price…”.

Unbeknownst to me, the next time we met up, one of the individuals had bought a stock I mentioned and said it was down 30% or so and then sold it. Besides the fact I would not have purchased said stock at said valuation, I can stomach a 30% drawdown. I think most seasoned, long-term, investors can. The average person can not.

There is a side of me that believes your actions are your responsibility. If you follow advice— or in this case mere commentary— blindly and act upon it then on your head be it. However, if you have an audience or there is even the slightest perception you know what you are talking about on a given matter, you have a responsibility to be cautious about what you say.

An intelligent investor will acknowledge the opinion of others as that— an opinion and not fact. The average person is not an intelligent investor. This is why I am careful when discussing individual stocks in this newsletter, on Twitter, or in person. I make the point of avoiding directional language, providing forecasts, and suggesting action. You never know who is reading.

At the end of the day, I am aware enough to appreciate that I am a student, not an expert. Someone who cares about their friends and family— or audience— should make sure to preface any commentary with similar admissions.

How should you handle requests for advice?

This article is partly my intention to share my thoughts on the matters discussed, but equally, I want to hear from others about how they handle this situation. If you have some thoughts, I invite you to leave a comment or shoot me an email.

As a blanket rule, I think questions related to directional outcomes such as what stocks to buy or where the price of gold will be in 6 months, should be shut down with a simple “you have to buy what is best for your situation” or “I don’t know”.

The irony is that only novices will ask such questions. Everything is dependent on the context but most people will never seek to educate themselves past the first peak of the Dunning-Kruger curve and this is why recommendations can be so dangerous— which alludes to what I said in reason 7 for why advising friends and family is a lose-lose scenario.

The average person will typically not pursue a path where they are dedicated to furthering their understanding of investing beyond a certain point.

Those who want to learn more

When you intend to develop independent skills in investing, you will naturally surpass the initial peak of ignorance and tumble into the valley of culture. Cultured in the sense that this is the point when you realise investing is not easy. At this point, you likely appreciate the frivolity of relying on the advice of others when it comes to selecting investments— so you won’t find these people asking you questions.

Those who don’t

For the rest, they will be quite happy learning a few terms and basics, and thereafter relying on the advice of others. This is a precarious relationship to have.

What is permissible?

There are times when friends and family ask questions that are relatively safe to respond to. These questions have less potential for harm. A personal example I can relate to is that of a family member, with children, who asked me some questions on the basics of investing and what vehicles were available in the UK to invest in, both for themself and their child.

Questions such as:

• What is a stock?

• What is an ETF and how is it different?

• Can you explain the costs related to investing?

• How do you buy these instruments?

• What vehicles are available to mitigate tax?

• Etc

Particularly in the UK, I feel more obliged and enthused to help, because the education and general awareness or enthusiasm for investing is so low. My approach here was to answer any question they had related to the basics of investing with thoughtful detail— what stocks are, what ETFs are, and how to identify the inherent costs of transactions. To provide an overview of what vehicles are available and how they differ (ISAs, SIPPs, General Accounts) on tax implications— but not to explicitly recommend any course of action. Candidly, I did steer them towards low-cost ETFs— warning that picking individual stocks is not something to be taken lightly when starting out.

All of this was said with the understanding that you can’t load years of nuance into someone’s head who is not going to undertake the same dedication as you— reading transcripts, filings, etc. With most fields, you have to learn the rules first before you can appreciate and understand the nuances and exceptions— or the ‘buts’. I wrote about this in 2022 in an article called ‘Investment Maxims Are Not One-Size-Fits-All’. I’ll share a quote from that to give you an idea of what I mean.

“Investment maxims possess a beautiful irony; a dichotomy between simplicity and complexity. Simplicity requires an incredible amount of hard work to accomplish and the knowledge to appreciate it. Because investment maxims are simple, the nuance is often overlooked. Not only are they misunderstood but they are also mistaken to be a one-size-fits-all solution to the stock market. What might be perfectly good advice to one, is not applicable to another.

The notion that “diversification is ignorance” could be a destructive piece of advice for a beginner. Failing to grasp the true meaning, they could assume this means simply owning fewer stocks. They may then construct a small basket of concentrated positions, all within the same factor, on the back of that newfound knowledge. Put differently, maxims like this require the knowledge to appreciate it. Have you ever been asked a question by someone less experienced than yourself to which you respond with a watered-down version of the answer? At the conclusion of that response, there is often a desire to add “buts” and “well in most cases”, and “well sometimes…”. There is a tail of caveats that can be overwhelming for someone who doesn’t yet have the base knowledge to fully absorb and/or understand them yet”.

So in this case, I followed up by recommending a series of books that would help form that prerequisite foundation of knowledge— covering topics like passive vs. active investing, shorter books that cover particular themes from the ‘Little Book Of’ series, and some rudimentary books that answer the basic questions that most new investors have like “what is a stock and why do they go up and down”.

In conclusion, I believe that providing specific advice to friends and family is a lose-lose scenario and one that ought to be avoided. For queries that are more general, I think it’s fine to cautiously inform friends and family of the basics by answering their questions and recommending ways they can educate themselves— while avoiding directional or transactional advice.

But these are just my thoughts on the matter. I am curious, how have you handled this situation in your life?

Thanks for reading,

Conor

1. No matter your opinion of advisors and the value they provide, a good advisor is knowledgeable about financial planning, and tax implications, and focuses on the specific situation and risk tolerances of an individual and how their personal finance goals should be reflected in their allocation. They give dedicated attention to an individual, with routine check-ins— something you can not.