We get stock tips all the time. Often they are a quick “buy this now” or “this stock will go up” without much explanation as to why they are bullish on the company. Sure it feels good to get a tip for free but I think random stock tips like these are more harmful than helpful to investors. Here’s why.

Conflict of Interest

First and foremost, we have to understand where are we getting the tip from. Does the person who pass us the tip has a hidden agenda? Maybe he is a broker who will gain if you make a transaction? Is he a banker trying to sell you an IPO offering? Of course not all brokers and bankers are out to take advantage of you. Some are genuinely interested in your money. However, we still need to be alert of the potential conflict of interest.

What Happen After You Buy It?

The issue starts after you follow the tip. Since you know so little about the company and is buying purely based on the tip. What is your next step after you buy it? What happen if the stock goes up? Do you sell it for a quick profit or wait for larger gain? What happen if it falls? Now you are under the water, do you sell at a loss or wait it out? If you wait it out, how long should you wait for a stock you have no idea why you bought it in the first place?

The situation raises more questions than answers. And it is really not a situation you want to bring yourself into. All this happens because you have limited knowledge about the company and not able to figure out a next step because you are unsure of where you stand.

Try This

There is two approaches that I think might be ideal for investors when faced with this issue.

1)      Ignore the tip. It is better to generate your own ideas so that you will be more comfortable with it when you invest into it.

2)      Treat the tip as a starting point. I agree not all tips are bad tip, but we should treat the tip as a starting point for us to get interested in a company. Use the tip to find out more about the company yourself. Ask questions to your tipper on why he/she like the company. Create a dialogue to allow yourself time to get to know the company better before investing in it.

Value In Action

If we invest for the long term, it does not matter when we are buying the stock. Spending one or two weeks to better understand a company is much better than buying blindly into a company.

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All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and does not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned above.

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