Every share investor, whether a beginner or more expert, will have followed a share tip at some point.
Just for the record, I’m not against share tips as such.
What I do have a problem with though is what people do with those tips when they get them.
More often than not, people receiving the share tip just go ahead and buy the shares without doing their own research first.
In my experience, that is the worst thing you can do.
Before we get to the reasons why, let’s just make sure we both know what we mean by a share tip.
What Is A Share Tip?
A share tip is a recommendation, from someone else, to buy shares in a particular company.
Share tips come from a variety of sources.
The worst ones come from friends, friends of friends, someone at work, a man in a pub/bar, etc.
It goes without saying that these are not proper share tips and you should never invest in any of these without thorough research of your own.
Most sensible people know this without any advice from me!
So these are not the kind of share tips I am really talking about in this article.
The ones you need to be really careful of are the more credible share tips such as those from stockbrokers, magazines, newspapers, websites, paid for tip sheets, paid for newsletters, free newsletters, etc.
These ‘proper’ share tips are a potential honey trap for a number of reasons.
1. The Tipster Is Not Really An Expert
The first trap is to assume that the person tipping the share (the tipster) knows a lot more than you.
In my experience, this is rarely the case, especially if the tip is in a newspaper or magazine.
That’s because these publications are written by journalists, not investors.
Yes, I understand that they will know something about shares and stock markets and so on, but they won’t have the time to do thorough research before tipping the shares.
They get paid for writing interesting stories, not picking winners.
2. Quantity Instead Of Quality
Share tipsters in publications and those selling tip sheets, etc. need to keep publishing tips to a schedule.
That’s all well and good if a great tip is always available.
But what if they can’t find a great tip?
Well guess what?
They still publish a tip anyway and tell you it is a great tip!
How are you supposed to know the difference?
Short answer – you can’t!
Stockbrokers are just as bad but for a slightly different reason.
They are sales people who need you to spend your money on shares so that they can make more money for their firm.
In all these cases, the problem is that the tipster’s objectives are not aligned with yours.
They are more interested in the quantity of tips they offer, not the quality of them.
You only need one or two fantastic tips to make good money but they need to keep churning them out.
3. Not The Best Time To Buy In
Even if the tipster has indeed found a great company to invest in, is now the best time to dive in and buy it?
It would be a really big coincidence if every time the tipster tipped a share, it was always the ideal time to buy in.
What is the probability of that happening?
Fairly low I would say.
There’s also another issue with timing your purchases…
4. Following The Herd
This is a real problem with shares in small companies, penny shares and the like.
Small companies are not bought and traded by the big funds and institutions so they are only traded by private investors in small quantities.
Look at the trading volumes of shares such as these and compare them to the big blue chip companies.
The trading volumes are worlds apart.
Now look what happens when a small company is tipped by a well-known tipster.
The volumes increase dramatically for a few days and the share price jumps dramatically.
Scared that they will lose the chance to buy in, beginners and the ill-advised follow the herd and dive in too, thereby chasing the share price even higher.
If you really must own these shares, you are far better off being patient and waiting for the share price to settle down again nearer the price at which they were tipped.
Of course, there is a chance that the price may stay high but in my experience this is rare.
More often than not, shares can be bought cheaper than they can in the few days after the share tip.
And if they do stay high then forget it and move on.
The tipster will be giving you another scheduled share tip pretty soon!
But there is another reason why share tips are bad for your wealth and it’s the one that is much worse than all of the others put together…
5. Forgoing The Chance To Learn
If you are to become a better investor, you need to learn how to invest and to learn from your mistakes.
How are you going to do that if you just listen to other people and follow their tips?
You may win some and you will certainly lose some too but you will never learn anything in the process.
To learn, you will have to do your own research.
At least check out the tip you’ve been given to see if you agree with the tipster’s analysis and rationale.
Always Do Your Own Research
Write down your thoughts in a journal/diary for those shares you invest in so that you can check how you did later on.
If you do this, you will build confidence in your own judgement.
You will learn that so-called ‘professional tipsters’ are not always right.
You will learn that you are right about your instincts on a regular basis too, more often than you are wrong.
And every time you do this, you will be one step closer to the day when you have the confidence to buy a share based purely on your own research instead of what someone else has told you.
And when you do that…
and it multiplies in value…
over the next few months/years…
so that you can sell it at a huge profit…
there is no feeling like it!!!
Well, perhaps one thing but this isn’t that kind of a blog!
I can’t promise you that every share you buy based on your own research will win big.
But if you do your own research and invest only in your best opportunities then you increase your chances dramatically.
Become your own EXPERT, focus on QUALITY, buy at the right TIME, follow your own INSTINCTS and keep LEARNING.
That, my friend, is the route to achieving your investment dreams!
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