Why Stock Tips Do not work?
It was 2004, When I was a teenager, I received a message on my phone which read something like this: “Intraday Tip: Buy NSL Corp CMP Rs.10, Target 15 stoploss Rs.8”. I was excited, some “professional” stock market analyst was willing to share his expertise with me, for free! I jumped all in with the money I had in my account. By the end of the trading session, I lost more than Rs.20,000 in a single day.
Today when I look back, the loss that I suffered does not seem to be that painful as it used to be 10 years back. What really upsets me is that even today, a large number of investors still rely on their brokers, or stock tips providers to make money from the markets. Stock tips are not the best way to make money in the market, but they are certainly the best way to lose money. After almost a decade, I know stock tips do not work and there are some strong reasons behind why they don’t.
Stock Tips are blind trades:
Stock tips are blind trades. There is no justification why a certain stock will go up or down to certain levels. If you ask, all they say is that they (or their group of experts) have done some research. Successful investors always look for many fundamental reasons why a stock will do good in future. If you cannot fill up a page with strong reasons why a stock will do good in future, you should not invest in it.
Stock Tips do not guarantee success:
Stock tips do not come with a stamp of guarantee, there is no certainty that tip you are going to follow will definitely work. If things do not happen as per your expectations, you will have to bear the pain of loss.
Since success is not guaranteed, it is always better not to rely on others and use your own head to make the right decision.
“You cannot make money on borrowed knowledge- Rakesh Jhunjhunwala”
Stock tips could be a fraud scheme:
Many rich and influential traders use pump and dump method to make unfair and unlawful gains. In this method, many influential investors with their wide network of brokers spread positive news about a stock, wooing individual investors to buy those shares. Once everyone starts buying, price of the stock goes up. This is the time where big investors sell all their holdings which brings the price of the stock crashing down, leaving no other option with small investors but to book loss.
Even today, many investors fall prey to these “tips”, So what is the reason behind so many people falling for this? Here are some of the reasons:
We all want to become rich effortlessly and quickly. But the world’s most successful investor Warren Buffett Says:
“Nothing sedates rationality like large doses of effortless money.”
Most investors see stock tips as an “easy way to make effortless money”. You don’t have to go through the pain of analyzing the fundamentals, you don’t have to go trough price and market trends, all you have to do is put this tip to work and make a fortune. Unfortunately, there are only two people who make money from this process, first, the tip provider, second, your broker.
Past performance record:
They say “you have to see it to believe it.” To convince their customers, these tip providers go to great lengths. They prepare a track record of past performance of their service, showing excellent track record. But you know what people also say? “Looks could be deceiving”. Trusting the past record blindly could be a mistake. So why do you have to be suspicious even if they have a visible proof of performance? Let’s understand how these excellent past performance is created:
Let’s say you subscribed for stock tips looking at their excellent past track record. As soon as you receive a tip, you run towards your terminal and find that the levels of buy and sell have already been achieved even before you decided to execute your orders. You feel you missed a great opportunity, but the truth is, the tip was sent to you after the levels were achieved, making you think it was your mistake not to be able to work on the tip.
Till now you have understood these stock tips do not work and why do we, average investors fall prey to these “scams”. Not all stock tips are scams, but as an investor you must be able to separate wheat from chaff. So how do you spot a genuine tips providers and not get scammed by other? There are some questions you need to ask them. If their answers are logical, justified and to the point, then rest assured that you are in the right hands. So what are the questions? Here is a list:
What does the company do?
The first thing you need to ask your advisor is what is the business of the company? How does it make money? If the person is a scammer, he won’t be able to present a convincing answer, as he will not have many positive point to put forward that justifies his recommendation. If he beats around the bush rather than answering your questions clearly and with confidence, it is the first sign of a scam.
How is the past performance of the company?
The next question you should ask is how the company has been performing in the past. The rationale behind asking this question is to check the performance consistency of the stock. If a business does consistently well, stock prices will ultimately appreciate, reflecting the quality of the business. If the business has an inconsistent track record, there is a good chance that the stock won’t perform well.
What’s the trigger behind recommending the stock?
The final question that you must ask is the rationale or trigger behind recommending a stock. What makes him recommend this stock? Is the company planning to expand its business, or diversify to another segment? Is the company going to perform better in future and what makes him assume that? Asking this question will give you an idea about the future plans of the company, if there is nothing much is being said about it, stay away from such an advisor.
Stocks are not pieces of paper, nor they are a lottery ticket which can be thrown away carelessly once the result, good or bad, unfolds. Every stock has a company behind it which conducts some business, making money for itself and its investors. The only way to make money successfully in the market is to find good stocks, buy them at a bargain and hold them for long time to take advantage of compounding return over the years.
Although I always advocate researching and finding good stock on your own, if you don’t have the time or willingness to do it, you can always get the helping hand of a good financial advisor, who will provide you the best and most unbiased advice helping your money grow.
So if you are really passionate about having a great future for yourself and your family, go ahead and do some research, if you cannot do it, find a financial advisor, sit down with him and discuss your needs and goals, chalk out a plan and start working on it right now, after all it’s your future, and the decision you make today will have a significant impact on your financial prosperity.