A few times per year, a client or friend calls me with a "stock tip" he or she heard from someone. I've never traded on these ideas for a few reasons. First of all, the tip is illegal if it comes from insider information. That alone is a showstopper. If the information is not from insider information, then it is just an opinion from someone I don't know who might not have done the proper analysis of this company's stock. In addition, the tip does not take into account if the investment is right for the new investor's risk tolerance and goals.
If it's not insider information and the analysis is impeccable, I still don't know when the analysis was done and if something has changed since then. Maybe the buy idea was based on an event that happened two months ago and the biggest movement in the stock is already over. Typically, by the time a stock tip makes it out of Wall Street and down to someone outside of the industry who doesn't follow the market on a daily basis, the majority of the buying has already taken place and the easy money has already been made.
Even worse, the caveats are often left out as the rumor of easy money works its way through the chain of hopeful ears. Storytellers only remember parts of the reason to buy and by the time a novice is ready to make easy money, he only knows a ticker symbol and none of the logic behind the trade idea. The original buy call might have been phrased as an "if, then" statement. For example, if the company's new product is a hit, then the stock should be a great buy. If certain legislation passes, then the stock is situated perfectly within its sector to have a windfall. If a new drug passes phase-three trials, then the stock will revolutionize how some horrible disease is treated.
Stocks are priced based on all known information at any given time. Daily and weekly fluctuations are caused by changes in sentiment and macro-economic factors. Any other attempt to profit from differences is speculation. While value, growth and technical traders have proven timing trades can work, these trades need to be enacted at the right time, not based on a rumor that has an unknown origin.
Investing does not include get rich quick opportunities outside of pure luck. Investors need to do their due diligence before buying or selling any stock, ETF or mutual fund. The majority of the people who chase stock tips would be better served paying down their high interest debt rather than taking a gamble on something they know little about.
Contact an AF Capital Management advisor about creating an investment plan that matches your objectives.
