The Motley Fool

Confessions of A Retail Investor: Tips You Shouldn’t Take

Every investor’s heard at least one “reliable tip” – one that sounds so exclusive and convincing, we just have to do something about it.  We’re not talking about insider trading – buying or selling based on confidential information about a listed company.  That’s outright illegal. Instead, we’re talking about everyday rumors, tips, and speculation. These won’t land you in jail, but they could prove painful for your portfolio.

Most of us hear stock tips from:

  • Information from friends
  • Feeds from social media
  • Financial news media and blogs
  • Market commentators
  • Wealth managers or customer relationship managers at banks and brokerage firms

Of these, we’re often swayed most by advice and information from friends.  We trust our friends, and we presume they’re looking out for our interests.  With someone we know, we naturally tend to skimp on fact-checking and credibility assessments.  Yet this kind of information often carries its own bias; people are far more likely to talk about their stock successes than their financial failures.

In my years of investing, I have fallen prey to this mistake more than once.   Each time the source is different, and if it is of any consolation, in ascending sophistication.

Regardless, my mistakes are always the same – letting “tips” from friends drive my investment decisions without performing due diligence of my own.   I don’t blame my friends; they are all experts in their fields, and their investments may have been a lot more successful.  Regardless, their comments should at best supplement my own research, instead of replacing it entirely.

These repeated mistakes forced me to re-think the way I made investment decisions – specifically, how a piece of hearsay could so easily circumvent rational analysis. Greed and sloth certainly contribute to that failing, but so does the way our minds receive information.  Your brain constantly tries to become more efficient, developing shortcuts, to process a larger amount of information in a shorter time. But some of these shortcuts become cognitive biases.  For example, we have a tendency to just follow others, and to be overly optimistic.  When our friends tell us about a sure-win stock, our brain’s first reaction is to let it in as truth.

To help you avoid this pitfall, consider two “screeners” that could be your first line of defense when you receive information. The next time you come across a “tip”, try asking these quick questions:

  • Is it a fact or an opinion?

Facts beat opinions, but opinions still matter. How much they matter depends entirely on the answer to the next question.

  • Who supplies it?

Is he/she a finance professional? Someone with solid knowledge and experience on the subject matter?  Why are they sharing this information?  Do they have any conflict of interest?  Is this firsthand information or hearsay?  If you get it from a news platform, is it a recognized and reliable one, or just a content farm?

These simple steps will help you weight any given piece of information or “tip” as part of your own fact-based evaluation of an investment.  It’s also the first step toward guarding against any impulsive buying or selling that might follow a “reliable tip”.

Humans prefer simplicity and certainty, but all investors must deal with complications and uncertainties.  We must recognize our inherent weaknesses, and apply independent and critical thinking at all times – especially in matters of money.

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