Before the founding of the New York Stock Exchange in 1792, investors have been and are constantly exposed to tips as to what stocks to buy. These tips come from friends, family, work associates and even investment professionals. Some are deliberately planted and others come from folks who think they are helping out. Watch out and be careful!
Never buy stocks on tips, rumors or “inside information.” It simply is an extremely unsound investment practice. Of course, tips, rumors or “inside information” seem to be what most people are looking for. But what most people believe and do in the market usually doesn’t work, so beware!
Certain advisory services and some daily business newspapers carry regular columns fed by Wall Street gossip, rumors, tips and planted personal opinions or “inside information.” This is not the kind of approach that one should take when making investment decisions. There are far sounder and safer methods of investing in the stock market. There is no replacement for hard work, knowledge and experience when it comes to making investment decisions.
Bernard Baruch, one the most well known of all investors, emphasized the importance of separating the facts of a situation from tips, inside “dope” or wishful thinking. One of his rules was to beware of barbers, beauticians and waiters—of anyone bringing gifts of “inside information” or “tips.”
Investors love to take advice from company employees, from top management to the janitor. For most the higher up the tip comes from, the better it should be. And I am not talking about “material non-public information” about a company which is known by the company’s board of directors or employees which the Securities & Exchange Commission deems as “insider trading”—which is illegal. What I am referring to here is legal information that employees share with friends and family.
Employees are notorious for falling in love with the company they work for. One way you can tell, is by looking at their 401k retirement funds and noticing that a majority of it is invested in the company they work for. Employees tend to think that since they work at the company, they have an edge in the knowledge about the company. In realty, these folks are often blinded by company publicity and loyalty and make plenty of mistakes when it comes to the buying and/or selling the company’s stock.
William O’Neil, founder of Investor’s Business Daily, states in one of his books, “Mainstream America delights in buying on tips, rumors, stories and advisory service recommendations. In other words, they are willing to risk their hard earned money on what someone else says, rather than on knowing for sure what they are doing themselves. Most rumors are false, and even if a tip is correct, the stock ironically will, in many cases, go down in price.”
Quote of the Week: “The fool doth think he is wise, but the wise man knows himself to be a fool.”—Shakespeare
Bart Ward is the chief executive officer of Ward & Co. Ltd. an Anoka based registered investment advisor – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.