The Hindu Business Line : Don’t fall for tips

While there is no sacrosanct way to filter stock advice, tips and so-called ‘insider info’ that you get, there are a few easy filters that can help you be ‘better safe, than sorry’.

Srividhya Sivakumar

The world of stocks is no different from that of cricket — every second person you meet will have an “expert” opinion on it! While cricket fans would enjoy such an information extravaganza, investors may just end up confused, especially if they have just begun investing.

So, how then do you decide who to believe? While, without doubt, doing your own homework on companies and picking up stocks would be the right way to go about the whole exercise, it may not be the most practical way to begin — after all, why learn from your mistakes, when you can learn from that of others!

That brings us to the moot question — how to decide whose advice to put into action? While there is no sacrosanct way to filter the advice, tips and so-called ‘insider info’ that you get in your lifetime, there are a few easy filters that can help you be ‘better safe, than sorry’.

Have your ‘thinking cap’ on

There is no dearth of stock tips in this age — be it your favourite news channel, news paper, stock broker or even friends and colleagues. There may not be any pressing need to act on such tips if you are a long-term investor, as long-term investments may not be as price-sensitive as the short-term ones.

But if you are a short-term investor, what should you look for when you receive a “buy” tip? Instead of blindly following the tip, try to study the report in detail.

Look out for details on the company’s business, its estimated valuation and target price.

The urge to immediately act on such tips can be irresistible, but do stop to make a back-of-the-envelope calculation of the risk-return payoff.

Even if the tip-offs do not come with reasonable exit points, it may pay for you to keep a targeted return on both the upside and the downside. Considering that some of these tip-offs come with unreasonably high target prices, makes the case for keeping your own target returns.

That said, even seasoned investors can fall prey to wrong tips or advice. A case in point — the various IPO analyses floated freely over the internet via blogs and mail groups that can be shallow or even worse, one-sided. So, even if you cannot analyse company balance-sheets, analysing the credibility of your information source is a necessity for a successful stint in equity investments.

If it’s free, think twice

More often than not, the ‘hot tips’ that you get on stocks that would ‘run up quickly, if you do not invest soon’ are for free. Beware of these ‘tips’ that are given to you for free. Why? Because no sane person would give you stock ideas that are immediate ‘multi baggers’ without charging something for it! Remember the world of investments does not run on charity, so what is given without charge may come with a hidden cost.

Your tipper could just be passing on the information to you, to help him prop up the share price of his own holdings.

Worse, the tipper could be but a pawn in the hands of someone else and may be giving away mis-information to everyone, unknowingly paving way for somebody else to dump his stock. For those who have read Jeffrey Archer’s book Not a Penny More, Not a Penny Less, understanding how and why such tips may be given would be easy.

That said, always be on guard whenever making money in the stock markets appears easy.

Even if it is not free, don’t stop thinking

If you think that paying for advice will insulate you from such ‘vested interest’ tip-offs, there is still the possibility that ‘wrong’ tip-offs will find their way to you.

Remember there have been cases, both in India and the rest of the world, where investment advisors with considerable clout have played foul. Investment bankers, after managing a company’s IPO, come up with ‘buy’ reports after the company lists; broking outfits with both an institutional and retail window can produce reports on companies that their institutional clients are stuck with or vice-versa — the list of such probabilities is endless.

While per say, none of these can be termed unethical unless proved, the very awareness of such possible discrepancies can help you peg a value to your tipper’s credibility.

But the ultimate test of your tipper’s credibility lies in acting on it. Just like the Chinese proverb that says, “never test the depth of water with both your feet”, to begin with invest only in small amounts.

That would give you sufficient leeway to step up investments once you gain conviction or to cut your losses if they backfire.

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