Investment Shastra

Why stock market tips almost never work?

Most people start investing in the markets with a lot of enthusiasm, usually acting on impulse rather than a well informed decision. What leads this impulse is usually a ‘Hot Tip’ received from a broker, friend or colleague. And in fact, many of us have burnt our fingers in the stock market by acting on such tips.

In this simple article, Liane explains why hot tips almost never work.

Every investor should come equipped with an understanding of his personal goals and limitations, a modicum of common sense and a degree of patience. Yet, in the world of investing, we are so often pelted by a barrage of varied opinions and options that we blindly trust in others supposed good fortune and make a choice that was possibly rotten from the start.

At the very head of the list of things to watch out for are those little nuggets of information, commonly known as ‘stock market tips’. These best avoided tidbits are what usually throw people off their game and end up causing havoc in the minds and on the pocket.

So let’s see why hot tips do not work…

A piece of Bad Advice…

There are times when a hot tip comes from a well meaning so and so. It could be a trusted friend or someone who’s actually made some money in the stock market, but the fact is that these tips don’t come with a guarantee stamp. The outcome could go either this way or that, but if you get stuck in a losing situation, there’s only you to shoulder the losses and the blame.

Prey to a Fraud…

On the other hand, the gullible investor is a target for scammers everywhere. In this age of invasive technology where information  and instant communication are right at your fingertips, it’s like putting a bulls eye of blood right on your forehead and waiting for the sharks to attack.

Sanjay Bakshi, in his article ‘When Trends aren’t Destined’, talks about a common scam trick. The scam works something like this. A bulk email is sent to a group of people offering a free tip that promises to multiply your money. What is actually done is that the group is divided into two and both groups are sent two opposite predictions. It’s obvious that one of the groups would have received a correct prediction and the other two would receive predictions that were false. The group that gets it right the first time, is further divided into two groups and again these groups are sent two different predictions. If this process is continued, it won’t be long before a few very gullible people would have received six accurate predictions in a row. All of them would be very impressed with the track record they observed and most of them would be willing to buy the subscription.

The best way to avoid such a scam is to remember that nothing comes for free, and if by some slim chance the tip turns out to be a pot of gold, it’s even better to remember that nothing lasts forever.

Why do we still fall for such stock tips?

1. A Pretty Package

Flanked by testimonials, big figures and a pervasive insistence, stock tips come disguised in a ruse so inviting, that we often forget not to judge a book by its cover.

2. Quick Cash

The promise of making big money in a shorter span of time is what gets our guard down. Although we know that Rome wasn’t built in a day, we often forget this little snippet of sense and leap into a decision mid stream without a paddle.

3. Following the Herd

On hearing testimonials and stories of past glory, we end up deciding that we too want a piece of the money pie.  Although man is a social animal, in the world of investing, it’s always each one to himself. Yet our constant fear of being left out while others are onto something big gets us jumping straight onto the band wagon without thinking of where it’s ultimately heading.

4. Last chance at redemption

For those who’ve lost a load of money in the stock market, there’s certain desperation, a need to survive. It is this last ditch effort which has us grasping for straws and hot tips and more. Rather than saving oneself though, this is a case of falling straight from the frying pan into the fire.

Whatever the situation or the reasons, remember that where investment outcomes aren’t logical, the process of choosing your investments should be.

The value investor is privy to this fact. Staying clear of speculation and on a whim investment activity, he avoids the herds, the emotions and usually the let downs.

So the next time a hot stock market tip comes your way, take a step back, consider the basis and regard the ‘at your own risk’ warning sign seriously.

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Liane Lawyer - Blogger, MoneyWorks4me