- Smart Investing
Stop! - Don't take those stock tips!
People love to give stock tips. You probably know of that one person who talks all day about the latest “hot stock”, often not even knowing what the company does.
There are 3 types of stock tips – all are dangerous.
#1 The Insider Tip
Anyone who works at a public company and anyone who works with a public company (a supplier or a customer) gains inside information about how the public company is doing. Perhaps they learn about a new product offering. Maybe they learn about the initial success (or failure) of that new product offering. They might even have financial information before the market.
While it is sure that people have made millions of dollars trading on inside information, there is no question that it is very illegal to do so and you risk jail time if you are caught. And make no mistake, the Securities and Exchange Commission (SEC) in the US and the 13 Provincial Security Regulators in Canada have groups specifically focused on identifying those who have profited on inside information. If you buy or sell before a public announcement (positive or negative), expect to be investigated.
In fact, as I was writing this, news broke that an Apple Employee, who was actually responsible for the Insider Trading Policies at Apple, was accused of insider trading.
Just don’t do it, it isn’t worth it.
#2 The Semi-Pro Tip
Lots of people spend their time listening to Financial Networks, following specific stocks and even doing technical analysis. But there is lots of evidence that, over time, more than half of professional stock pickers underperform the market. In other words, if you were just to buy all the stocks in the Dow Jones Industrial Average, you would beat more than half of the people who pick stocks for a living. Sure, there are plenty of examples of managers who outperform the market for a year or two. But, with some very rare examples, that over-performance doesn’t stand the test of time.
So, if professionals struggle to beat the market, how would you expect amateurs to do? Don’t take advice from amateurs.
#3 The Self-Self Interest Tip
The last category of tips is probably the most dangerous. When people buy stock they now have a vested interest in seeing that others buy the same stock. In fact, many take to the blogosphere to trumpet news (real or fake) about the companies they own so that other people will buy the stock, the price will go up, and they will make money.
In more well meaning examples, human psychology will make someone who has made the decision to buy a stock want to validate that decision by telling you it was a good idea. Just like for the semi-pro tip, there is rarely any good information or analysis about the stock in question. You’d be better to just throw darts at a dartboard and pick stocks that way.
Avoid stock tips unless you are getting advice from a Professional.