Hot Tips

The so called free hot tip is costing amateur investors oodles of money.  In my 40 plus years in the business I cannot count how many tips, whispers and suggestions of stock and other investments I’ve heard, read and ignored. In today’s internet age it doesn’t take much of a stretch to Google a chat room or web site that touts a stock or even have a penny tip come right to your e- mail. There have been suspicions that many of the financial magazines have been complicit in spreading a tip by quoting a ‘respected’ economic source. However, most of the time the origin of the tip is so anonymous that Colombo would throw his hands up in frustration trying to find out who started it. Still amateur investors routinely invest hard earned money at these fables and usually end up sorry but most often none the wiser. Whenever you ask someone who told them about the so-called ‘off-brand' investment they’ll say something like, ‘I got it from my wife’s brother who got it from his golf buddy who heard it from a reliable source at the car oil change garage…’

It’s pretty hard to dissuade people from throwing money at these tips. I remember when K-Mart filed for bankruptcy and people got very angry with me when I told them their money would be worth nothing when the company emerged from bankruptcy. It was as if I was trying to stop folks from getting rich. The same was true with General Motors and Woolworth. (You do remember Woolworths, the world’s largest retail chain until 1997?)

A dentist I went to see about his investments proudly told  me his entire retirement plan was invested in Woolworth’s second mortgages. Should I say how well that turned out or can you guess?

Even the pros are wrong a lot of the time. To prove my point I found an old Smart Money magazine. There was an article that offered up the only 10 stocks one had to buy for the next decade. Buy these ten, the article boasted, and forget about buying anything else. Maybe the timing was wrong since this piece was written in 2007 a year before the markets went poof. Still  you can’t use that as an excuse for every investment since in the real world many stocks have recovered and others have surpassed their pre-recession price.

Without boring you with my research out of the Smart Money list of 10 stocks touted : 4 stocks lost money,  2 were relatively even and 4 were up. One company was bought by another at a hefty premium shortly after the article was written and subsequently the acquiring firm’s stock price has fallen.

And, in the same issue there was a mock debate that centered on Apple and if the stock, at the time trading around $88 a share, had seen its best days. Today the shares are north of $300.

It’s not only the experts that can get it wrong there are family members who’ll hit you up so you to get in on the ground floor of a fountain pen that’ll write under whipped cream or a perpetual motion machine; and for the few thousand that’s collecting dust in your seat cushions you could be a billionaire.  In most cases you’d be better off loaning the relation the money and having them sign a note so you can write off the eventual loss.

Most amateur investors expect hefty returns as soon as they plunk down their money into a specific stock or investment. Alas, dear reader, even the best professional money manager doesn’t get it absolutely, positively right and that’s using computer programs, technical assistance and decades of experience. 

The point is most hot tips end badly but here’s a checklist of things to do before you invest your money:

• Credentials of the Tip Giver. Is it a Buffett or someone at the water cooler who thinks he’s a Buffett.
• What’s the motivation? Is there a finder’s fee or a relation somewhere in the mix? Or is it simply that misery loves company?
• What is the background of the investment? Is the potential investor given all the facts such as risk and history?
• How liquid is the money invested? Can you bail at a reasonable time?
• What are the fees and expenses and how do they stack up with other investments.
• Is the investment registered and conforms with the state Blue Sky Laws or is it a under the table type of investment? One call to the state can save you money.
• Finally, can you afford to lose all the money without having a detrimental change in your lifestyle?

And if you cannot do the above get a second opinion from someone you trust like your CPA or financial advisor. The money they’ll charge is small potatoes compared to how much you may lose.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.