A successful self trader – Rule # 40
We all come across that over-enthusiastic analyst who wants to pass on a hot tip on which stock to buy and which to sell. Remember, nobody in the market ever made money with a hot tip. At least, not consistently! Sadly, most hot tips have a vested interest and are meant to fleece you while outwardly appearing to be seductive. So, let the next hot tip find its way into your dust bin. That’s where it belongs.
TAKE HOT TIPS WITH A PINCH OF SALT
Back at the peak of the real estate boom in 2007, an anonymous stock market advisor called up investors from Gurgaon with a sizzling hot tip. Unitech at Rs.10,000/- was dirt cheap and could be a 10-bagger in one year. He suggested brokers to buy and also strongly recommend to their clients. For those who took that tip seriously, exactly one year later, Unitech had lost 95% of its value.
Honestly, no one had ever imagined that some of the world’s largest banks will be on the verge of bankruptcy by end of 2008. But then easy money is the most difficult thing to make in the market. More so, when an anonymous well-wisher wants to help you multiply your money 10-fold for no conceivable reason. Always treat hot tips with abundant scepticism.
I always tell my clients that you can throw the tips but try to cross check the information behind the tip. More often than not, there is some hidden intelligence behind these tips. In late 2013, there were strong tips of a revival in the market on the back of the Modi phenomenon. These were not entirely unfounded, because as I said, there is hidden intelligence behind most tips!
3 STRONG OBJECTIONS TO STOCK TIPS
Nobody wants to make you a millionaire
That is too optimistic in the modern world. A stock tip is normally given by a person who is stuck in a position or who has committed to support the price of a particular stock. Both of them are looking at you for an exit route.
Only an insider knows the inside story
Typically tips are little more than whisper campaigns. If your tipper claims to have inside information, he has got to be an insider. Secondly, no responsible insider will ever indulge in loose talk on privileged information. Forget it!
He who can predict the short term is a genius or a liar
That says it all. If someone can convincingly identify a multi-bagger in the short term, he would already be a multi-millionaire. Remember, the best minds in the market always keep their ideas a closely guarded secret!
“Stock markets transfer money from the active to the patient investor” – Denis Gartmen
6 TYPICAL REASONS WHY PEOPLE GIVE YOU TIPS
- They are trying to make a name for themselves. In the competitive world of stock market advisory, most advisers virtually act as an active machine to disseminate tips. In a bull market, the bet is that even a monkey portfolio will outperform the market. So, why not take a chance? You have to avoid these advisors.
- A mid-cap company has many reasons to keep their share prices buoyant. It helps them get better borrowing value against shares. It gets them a better price for a rights or a new issue. These networks are typically cultivated by brokers and promoters to enhance the stock price. Advise caution!
- A large investor is trying to exit the stock and wants to avoid price damage till the exit is completed. This is common among institutions and retail investors. As liquidity gets absorbed in the market, the exit is smooth and also does not raise any suspicion. Remember Himachal Futuristic.
- Riding piggy back on another famous investor. It is so common for someone to give you a tip-off saying that another famous investor has been accumulating it. Please remember that no successful investor is daft enough to leak their trading strategy beforehand or let others make money.
- Testing retail appetite is another reason for tips. This is more in case of new ideas or emerging industry segments like biotech, ecommerce. The idea will be to eventually offload the stake through an IPO. However, a longer case build-up may be required in such sectors. You don’t have to be the guinea pig.
- Most likely, someone missed the bus and is giving sell tips to accumulate the stock at lower levels. This normally happens when we sell early, only to regret later. I know of people who exited Eicher too early in 2011 and are now trying to make a negative case against the stock, to get it cheaper.
SEPARATE THE APPARENT TIP FROM THE HIDDEN INTELLIGENCE
Tips are not so bad if you are willing to look at them as a source of information rather than as a source of investment advice. Most tips have some investment intelligence hidden; either positive or negative. Buy calls on Unitech in 2007 surely had negative intelligence hidden in them. Rumours of the debt trap that the ADAG group was getting into in 2008 had positive intelligence hidden in them. Similarly, when Educomp started closing down its franchisees, there was again intelligence hidden in them. Separate the wheat from the chaff.
The good thing about tips is that it never comes about without a pressing reason. There is no smoke without fire. Either someone is stuck in a position, or they are desperate for an entry or exit or perhaps some small event may have larger implications for the stock price. After all, nobody identified Infosys as a multi-bagger in 1994 and tipped you!
TAKEAWAYS FROM THE “TIPS ARE FOR WAITERS” DEBATE
Peter Lynch of Fidelity perhaps summed it up best when said, “When the cabbie and the bellboy start giving you stock tips, remember it is the end of the bull market”. You always need to look at market tips as indicative of a deeper story, not as an investment argument, per se. It can give you amazing pointers into the future of the market, if you look at it that way.
Let me conclude by saying that “Tips are waiters” is not a pejorative statement on waiters. A tip is always a small percentage of your hotel bill. That is exactly what tips should be for you; a very small percentage of your investment decision. Listen to the tip, study the information, extract the intelligence and finally throw the advice in the dustbin. You will be better off.