If you dabble in online investing, you have certainly been deluged by emailed offers of investing advice and "hot stock tips". Undoubtedly, some good stock tips are out there, as well as a whole host of questionable ones and some that are outright guesswork. How can you tell the difference? After all, even the best professional investors and advisors are fooled periodically by events.
We cannot give you any hard and fast rules, either – but we can give you some general guidelines.
- Take the Time to Verify – Blindly accepting any stock tip from a single source is not only foolish, but it is also lazy. If you are not going to verify any tips, you might as well go to the sporting goods store and buy yourself a dartboard. You would arguably do better with the random results of the dartboard than with potentially misleading stock tips.
If a tip on a particular stock is so far out of line with other analysts, what is their logic behind their choice? If it is based on generic “information” or “experience in the field”, shy away from it. Make them back up their claim with tangible facts.
It is wise to research the tipster as well as the tip. Check their credentials, history, and any record of complaints with the Better Business Bureau or any regulatory agency.
- Compare Results – Does the tipster tend to follow up on his or her own picks and analyze the results?
If you think that a particular advisor has potential, check out their recommendations for a while and save them for future reference. After a sufficient amount of time has passed, review their picks. Is the advisor’s advice generally sound?
- Value Philosophical Tips over Individual Stock Tips – Tips on individual stocks have a limited shelf life and are almost always designed to take advantage of a short-term issue. Tips that target investment philosophy, such as tips on how to rebalance a portfolio or how to dig into the specifics of a stock metric like a P/E ratio, have greater applicability and a longer life span.
It is analogous to the old proverb about giving a man a fish versus teaching him how to fish.
- Consider Motivation – Why is this stock tip being shared with you? Is it an attempt to sell you a service? Are they trying to draw traffic to a website with a particularly controversial tip? Is the tipster a paid company analyst or an independent investor?
Take note of whom the tipster works for, and look for disclosures stating whether the person has a vested interest in the stock.
Remember, any individual in their right mind who has a truly surefire hot tip on a single stock will be using it to make money for him or herself. Does your purchase of the same stock help the tipster in any way?
Ultimately, the best way to make sense of stock tips is to have enough knowledge to be able to put them in context. You can recognize straight-up nonsense, and will develop an understanding of the best way to verify tips that seem to have promise.
That means educating yourself on basic investing principles. Soak up all the information you can about investing principles, and you will be more likely to be able to pick the gold nugget tip out of the rest of the tips in your pan that are merely rocks. Otherwise, good luck and enjoy your dartboard.
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