Saturday, July 17, 2004

Asymmetric Advice

Article by Chris Dillow in the Investors Chronicle, which claims that "advice to buy or sell shares is silly and patronizing".

Bye-Bye to 'Buy, Buy', July 16th, 2004
link for Investors Chronicle subscribers only

This is not just because such advice is inaccurate. It is because you simply cannot advise someone properly without knowing their particular requirements.

If I already hold a perfectly balanced portfolio, and I already have perfect information, any advice to me would be either superfluous or dangerous. If I don't hold a perfectly balanced portfolio, and I don't have complete or perfect information, the effect of a new piece of information and/or advice is unpredictable.

An investor receives investment advice concerning a given stock, and composes this with information and opinion from other sources to produce a composite picture.

Suppose the investor then decides to buy or sell the named stock, or some derivative thereof. This action is composed with other actions (past and present) to produce a given composite investment portfolio with given risk characteristics.

A valid composition should be aligned to the investor's particular requirements (objectives and risk preferences). The investor should only buy or sell if this improves the alignment between the composition and the requirements. Therefore, advice to buy or sell is not a mass commodity, to be disseminated to a homogeneous audience of retail investors, but must be tailored to the needs and circumstances of the individual investor.

This is an excellent example of Asymmetric Demand

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