There was a time when I believed (like most people) that merely being rich equates to wisdom with money. As if the moment one becomes wealthy, they become the financial equivalent of Aristotle. I don’t quite know where we as a society get this from, but for whatever reason, this is the way many individuals think.
When I was advising clients daily with their finances, every so often I’d sit down for a meeting and all of a sudden my client would be going on about their rich friend and how they told them they should invest in this hot opportunity.
Was this frustrating? Absolutely.
Especially when you would hear the next few sentences coming out of their mouth. Let’s just say I heard enough people talking about getting into medical marijuana and the potential of legalized marijuana distribution in the state I lived in.
I have gone through this many times in my professional life. Today, I want to go over four reasons why it may be a bad idea to listen to your “rich friend” about so called investment opportunities, or stock tips.
1. Rich does not equal great investor
Before you listen to your rich friend, you should probably think about how your friend has accumulated their wealth. Did they inherit most of their money? Not that inheriting money means they don’t know what they are talking about. But, you should take into consideration if they have success in a field related to the opportunity or company they are talking to you about.
Maybe your friend is a real estate developer who is suddenly getting into this so called great opportunity in technology. Or, maybe your friend who made tons of money in his tech company, decides she wants to start a restaurant chain.
I’d think twice before your tech friend hands out investing opportunities in a pizza restaurant.
Or, maybe it’s not a business opportunity, but a publicly traded stock.
You know you have heard it before. Your friend goes on and on about how, “This stock is hot right now.” And that “It is going to go through the roof this year!” You can see it in their eyes; they are passionate about this particular opportunity.
Well, your friend is a dentist investing in a FinTech IPO they know nothing about. They just read some idea on Reddit and then saw someone talk about it on CNBC and all of a sudden they are obsessed with this stock. Because they are wealthy doesn’t mean they know any more than you do about the IPO of some FinTech stock.
2. Many businessmen and women excel at one or a handful of business principles; none of them being investing.
I have met many successful business people who have accumulated wealth because they end up flourishing in a particular industry or position. This is great, but it does not necessarily make them knowledgeable about investing or money management. I have met many gifted salesmen and women who are wealthy thanks to their ability to sell. Maybe it’s selling real estate, maybe it’s insurance or medical devices, maybe it’s even cars.
If your New Yorker friend, Tim, is a great salesperson, it doesn’t mean you should listen to him about investing in the stock of John Deere. Tim knows nothing of analyzing stocks and he hasn’t been on a farm in his life – he sells advertising in Manhattan.
Yet, one of Tim’s rich friends told him about investing in John Deere. Tim tells you about this great stock tip so you take it as impeccable advice.
Just because Tim is rich, and his friend is rich, that is no reason to listen to either of them.
People like Tim sometimes make so much money, they can afford to make bad investment decisions. Their income may replace their loss in a month, whereas your income may not replace your loss for two years.
This brings us to our next topic…
3. Your rich friend may need far less capital to invest than you do and hence takes less risk
Your wealthy friend may tell you about a great opportunity, and that opportunity may require you invest, say, 90% of your savings. Your rich friend may not realize it, but your 90% of savings could be the equivalent of only 10% of her savings.
You may be FAR more invested into something than your friend who gave you the opportunity in the first place. Sometimes you find situations where your friend has no idea and is ignorant to this fact. Sometimes you find people who purposefully prey on their friends and acquaintances knowing full well they have much less exposure and are thus taking much less overall risk.
Keep in mind that your wealthy friend may not realize how high a percentage of your savings is needed to invest in an opportunity.
4. Some successful business people are speculators
Did your friend make their money speculating? Speculating comes in many forms and disguises. You can sometimes pinpoint the speculator when you ask about his or her history.
Before they finally accumulated their wealth, did they fail many times? Were they involved in multiple different companies or industries before they made it? Did they go broke more than once? Did their four multi-level marketing ideas fail and their 5th is where they got rich?
Get a history of your friends past investments and endeavors before you trust their advice with your finances. As we know from above, you may be taking more risk than your friend since it will require a high percentage of your overall savings. Whereas your friend may invest the same amount of money, but it will be a much smaller percentage of their overall savings.
In closing, before you make any decisions, make sure you think about your wealthy friend not as a genius of money, but someone who is likely gifted in a certain area. It may be sales, it may be real estate, it may be business management or banking.
Don’t forget to get a history of how they built their wealth and how many times they have failed. Try to determine if they are a speculator, or if they are a seasoned investor who has proven they know what they are preaching.
If the amount of money needed is a large portion of your savings, don’t forget that your rich friend may not realize this, or may not care. But throwing all of your eggs in one basket is usually not a great way to build wealth long term.
Thanks for reading!