BARENAKED MONEY PODCAST: EPISODE 1

Bad Financial Advice

Colin White:

Welcome everybody to the first pilot episode of Barenaked Money, our attempt at putting together something in the form of a podcast that we hope you find interesting and useful thought. I thought I'd give you a little bit of background as to why we chose Barenaked, so we're going to tell you the whole story. So there's going to be no hidden corners, there's going to be nothing that we obfuscate. We're going to try to really shine a bright light on topics that we choose to talk about. It's a pretty topical thing right now, Josh. I mean, everybody's getting their information off this thing called Reddit. As a young guy who's getting all his information off the interweb, you must know all about that.

Josh Sheluk:

Yeah. I wouldn't say I know all about it, but you mentioned Reddit, and I think part of our focus today is going to be bad financial advice. What does it look like when you're getting bad financial advice? And of course, we're going to be a little bit biased on this as advice givers ourselves, but the Reddit thing has become extremely fascinating, especially over the last week. We've seen the whole GameStop story, which may have played out at this point. We're a week in. It's already played out.

Josh Sheluk:

Silver is the new thing. I don't know if you've heard that, but I watched a TikTok video. Yes, I did watch a TikTok video today, and it was a guy saying, "Silver is the next thing. Silver is going to be bigger than GameStop, so go out and buy silver." I think he suggested buying four ounces of silver, and every man, woman, and child in the United States should have four ounces of silver to make this happen. So a lot to unpack here with just this one. And when I look at the advice space today, especially when it comes to money, technology and social media have made it easier and easier to give financial advice and to receive financial advice, but at the same time, I would say that the quality of advice has gone down.

Colin White:

Yes. People take information, and they feel they've been given advice. And sometimes, there's a thin line between the two. But yeah, information absolutely is easier to get out there, and people are, all the time, using the microphone available to them to spread whatever they like. And if it's interesting, people will continue to share it. But no, I don't think it's as much advice as it is information is easier to get.

Josh Sheluk:

Yeah. And that's fair. So let's just unpack this Reddit thing to start, because it is absolutely crazy. A few weeks ago, the folks on Reddit, they banded together and said, "Well, GameStop, this is one of our favorite companies. We shop at GameStop all the time. There's a whole bunch of short sellers out there. Let's all bid up the stock. Let's start buying shares of GameStop." And with 4 million followers or something on this Wall Street Bets subreddit these days, that's a lot of buying power going after a company.

Josh Sheluk:

So despite the lack of success that GameStop has experienced over the last decade, if you have enough people throwing enough money at something, it's going to go up in value. Should it go up in value? I guess that's something for us as historians of the market to debate a little bit, and people that focus on the actual fundamental success of a business.

Josh Sheluk:

But the bottom line is, for a short period of time anyway, you can definitely inflate the value of stock. And I don't know if you could even really call this advice. Maybe there needs to be something a little bit more substantial. But there's certainly been people out there that have made money by investing in GameStop and other stocks like it that have a high amount of short interest from the forum of Reddit.

Colin White:

I think that's what the key is, Josh. There's people who have made some good money off this. There's a business model here. For me, everything is about the business model. I attended a seminar that was put on one time by a mathematician. Yes, yes. I'm that guy. I go listen to mathematicians talk. And before he started his presentation, people were peppering him with questions about becoming a millionaire, and he kind of offhandedly gave the acceptance.

Colin White:

"Well, that's easy. You want to become a millionaire? Give me a list of 64,000 names. You do up a newsletter. Half of them, you predict the market's going to go up. Half, you predict the market is going to go down. You were right on half of them, so you got 32,000. The second time you do the same thing. You keep dividing the list by two. After six newsletters, you've been right six times in a row to a thousand people." You send them a note saying, "Send me a thousand bucks, I'll keep sending you my newsletter, because my big super computer is going to keep predicting the markets. A thousand people send you a thousand bucks, you're a millionaire."

Colin White:

Now the problem is, as mathematically true as that is, it's illegal. It's called fraud. So, the business model behind these things, typically somewhere in the start, the first few people through the door now have a vested interest in turning this into something big. And the subreddit gives them a real happy audience, who can share things really easy and build the buzz. And so, the first people through the door on things like this stand to make a lot of money.

Colin White:

So, as much as it's being portrayed as it's just the people rising up against Wall Street, I think if we look closely at this, no, it's not necessarily that. It's a little bit more nefarious, and I think that when the SEC and those people get involved and look at it, they're going to have some opinions as to how these things got started and what was good or bad about them.

Josh Sheluk:

Yeah. One of the things that you brought up there that I think is super important is it's really hard to distinguish good advice from bad advice if all you're doing is looking at the results of that advice. Because like you said, if you put enough predictions out there, and look, there's thousands or millions of people that are commenting on markets these days, with predictions of this, and that, and the other thing, at some point, one of them is going to be right.

Josh Sheluk:

And at some point, a handful of them are going to be right multiple times in a row to make them look really, really smart. And then you start focusing on the results, focusing and following those supposedly really smart people, when really, they just got lucky for a little while. If you flip a coin enough times, you're going to get 10 heads in a row, as unlikely as it is. So that's just speaking to the luck that comes into play with investing. And you can't really focus just on the results when you're trying to look for this good advice.

Colin White:

Yeah. It's been described as the halo effect. Somebody makes money. "How did you do it?" "Well..." Then they tell the story about what they eat for breakfast. "Ooh, everybody should eat that for breakfast, because they made money." "And I exercise three times a week." "Ooh. If I want to make money, I need to exer...