Here's a story that illustrates why we continue to harp on this key lesson. It's about baseball, a best friend and a high stakes bet. It's my of favorite baseball story.
As a young teen growing up in a Pittsburgh suburb in the early 1970s, I was a die-hard fan of Steelers football and Pirates baseball teams.
I never lost that ardor for the Pittsburgh black and gold - not even after my Dad accepted a career transfer to Baltimore in 1974. I will happily admit that, during my decades as a Maryland resident, I turned into a big fan of the Baltimore Orioles, too.
But to this day, whenever Pittsburgh and Baltimore face one another, my allegiance is clear.
In 1979, when the Pirates and Orioles were set to square off in the World Series, I was a freshman at Penn State. And my best friend Harry was an apprentice machinist at a small manufacturing firm near Baltimore.
Harry wasn't much of a baseball fan - didn't follow the game, and didn't know much about it.
As he told me later - years after the story I'm about to relate played out: "All I knew about baseball was that you are a smart guy - a college guy - and that you liked the Pirates."
Actually, it wasn't just that I liked the Pirates. I was bonkers about them. I had Bucco fever.
As the pennant race heated up, and the team swept through the playoffs and into the World Series, I must've babbled about "my team" all the time.
It was a fan's view ... not a rational one.
The Showdown Between The Bucs and The O's The team had made an amazing run into the playoffs - fueled by my favorite player, Willie Stargell, who at 39 had turned the pennant race into a personal hitting display. Then he demolished the Reds in the playoffs, putting the Bucs into the Series for the first time since '71.
So I guess I was walking around telling everyone who would listen how the Pirates were going to trounce ... crush ... destroy ... the Baltimore Orioles.
To me it was just talk. But Harry, who really didn't follow baseball, took my views on Pittsburgh as the gospel.
He also took my views on Pittsburgh to work ... where they didn't go over too well.
I'll spare you the details - I'm not even sure I remember them anymore - but the result was that Harry and a custodian ended up betting a week's pay on the outcome of the series. Harry took Pittsburgh - a sure thing, he figured, since I said the Pirates were a lock to take the series.
A week later, with Pittsburgh down three games to one - a deficit that only three teams in MLB history had ever come back from - Harry called me at school. He called me every weekend ... that's what best friends do. And, even today, he's one of the calmest, most-even-tempered people I know.
So when Harry asked me, with his characteristic nonchalance, if Pittsburgh would bounce back and take the series, I thought nothing of it.
Still afflicted with Bucco fever - and knowing nothing of the bet - I answered (with what must've sounded like great confidence): "Of course."
Whatever I said, it was good enough for Harry - he and the custodian doubled their bets to two weeks' pay.
(As Harry later recounted, before the bet was actually doubled, he and the custodian found themselves facing off atop two massive milling machines, hurling challenges and good-natured insults at one another - while the rest of the company's employees stood in a circle around them down on the floor ... hooting and yelling in approval.)
If you're a longtime baseball fan, you know the rest: Pittsburgh became only the fourth team in almost 80 years to come back from a three-to-one deficit to win the Series, with Stargell homering for the decisive hit in Game Seven.
Harry called me at Penn State a day or so later.
"Bill, I sure can't thank you enough," he said.
"For what?" I asked.
"For all the great insight on the Series ... for my bet," he said happily ... as my blood ran cold and my heart stopped.
Then he told me the whole story ... how he'd made a major, "bet-the-farm" financial decision based on the "insights" that I - a supposed "expert" - had presented to him.
Listen to these points, and tell me that this story from 30-plus years ago doesn't remind you exactly of the way analysts "work" U.S. retail investors in this country today.
The Lesson Behind the High-Stakes Bet First and foremost, Harry committed money - a proportionally large amount of money, considering what he was earning at the time - to a financial transaction he knew little or nothing about. Except he didn't realize he didn't know much about it: Harry figured the "expert" had told him all he needed to know.
For my part, I didn't know Harry was making the moves. I didn't know what elements of the information that I'd given him he was basing his decisions on. I didn't know what kind of shape his overall finances were in. I didn't know his risk tolerance. I wasn't available on a moment's notice to consult with him if he had any follow-up questions. And I wasn't around to tell him to get out of the transaction when the trade went bad (when the Pirates went down three games to one).
Last, but certainly not least, I really didn't know what I was talking about. I was more of a "cheerleader" than an expert on the "investment" I was touting.
If you look at all of this, I've just detailed the kind of relationship most of America's individual investors have with Wall Street analysts. And, yet, those investors make life-altering decisions based on what those distant and faceless Wall Streeters say every day.
My story actually describes how most Americans manage their investments. They commit money to transactions they don't understand. They accept - at face value - investment guidance from people they perceive as experts, but have never met, haven't checked out and will never interact with. Most investors don't do their own due diligence - the "homework" needed to succeed.
Then there are the analysts themselves. Admittedly, some are very, very good. But many analysts play the same role with the companies they cover that I played in this story: They are more like "fans" of the companies than true experts. They're more like cheerleaders, or "touts," than number-crunching scholars. The worst ones are actually pump-and-dumpers.
In short, when these "pseudo-analysts" speak, they're really just shooting their mouths off - just as I was with Harry.
There are two notable differences.
First, I actually cared (and still care) about Harry's well-being, something investors can't say about Wall Street analysts. And, second, despite the huge odds to the contrary, this story actually had a happy ending: Harry not only won the double-or-nothing bet, he won big. The custodian was a multi-decade veteran of the company, meaning he actually made a heck of a lot more money than a first-year apprentice like Harry.
So my best friend enjoyed a hefty payoff on bet-settlement day.
Harry can be excused for his role in this - he was only 18 at the time, and didn't realize we were talking at cross-purposes. And, truth be told, given the risk/reward ratio (because of the salary differential), Harry often said he might've made the wager anyway.
Are we still best friends?
Absolutely. Harry is a terrific father, with two great kids. I'm godfather to his daughter, who just graduated from high school. And Harry's son is a college-engineering student, and is the godfather to my little boy.
Thirty years after it happened, Harry and I laugh like blazes whenever this story gets retold.
But I'm quite sure the story is very different for the bulk of America's retail investors, who lost trillions in the financial crisis after they followed the "recommendations" of the second-tier analysts I just talked about.
In fact, I'd be willing to wager that, no matter how many years might pass, those investors will never see their losses as a laughing matter.
And I'm not a betting man.
Related Articles and News:
- Morning Money:
The Tragic Investing Tale of "Big Al" Clifton
- Money Morning:
Don't Let Wall Street Play You For a "Fool"
Tags: A Best Friend, A High-Stakes Bet and My Favorite Investing Lesson From Baseball