Sharing stock tips is a great way of making friends. In a dream bull run, such as the current one, everybody has a view about stocks. Whoever I meet and share my background with immediately asks me, “Market kya lagta hai?” (What do you think about the market?). This question has become such a cliché in the investment community, but it happens every time! Everyone has an opinion on the markets and especially on stocks. From businessmen to the cab drivers. In a bull run, perhaps most who give tips to buy are proven right. But such tips generally become a game of Chinese whispers. Many stocks, especially in the mid and small cap space, are pumped and dumped through operators working overtime on the rumour mill. How can we tell the difference in such an uncertain world? Indeed, it is a very pertinent question – How should we handle tips?
There is one simple truth that we can start with. If I or anyone else could predict what the market is exactly going to do in the very short term, then we wouldn’t be where we are currently! We would obviously be jet-setting somewhere in the world, enjoying our near infinite wealth. This fact should always be kept in mind. Even when we are interacting with a very successful person or someone with a wide network, we should know that the market is, by its nature, unpredictable. Thus, it is a good idea to hear everyone out, but do one’s own analysis.
In the short run, the markets are driven by sentiments, news events pertaining to a period of a year or so. But in the long run, fundamentals will take over. This has been beautifully put by Benjamin Graham, the father of value investing:
"In the short run, the market is a voting machine but in the long run it is a weighing machine."
Patterns repeat themselves constantly in nature. Just look at the cycle of the moon, or the game of survival for animals in the Savannah. Similarly, human nature also works in patterns. If we attempt to invest just for the short-term pop, we run the risk of getting caught in a bubble and may not be able to book profits in time, because we cannot predict where the game of musical chairs stops. If we are to invest for the long run, then we must do at least some basic analysis of tips given to us by our benefactors. We must attempt to understand whether a stock given as a tip is likely to perform or not. Conviction can be developed only if we can understand why the particular stock can perform well.
We must distinguish between tips that we receive from real participants in industries and those meted out by “experts” on news channels and social media. Information that is public and that we can obtain from a company’s customers or vendors should be given more weightage, keeping some room for biases. On the other hand, we should be more cautious and sceptical about what we see on the TV and on social media. Same goes for “Finfluencers”, who are known to undertake paid promotions or who might want to simply increase the viewer and subscriber counts.
It is prudent to see how a few tips given by someone perform before jumping in with an investment. Over time, we can start to develop a circle of trust with those contacts whose tips are generally more solid.
This is how we can turn the risky business of stock tips into a strength and include it in the investment process. Rather than following stock tips blindly, it is crucial to develop independent views about them before any investment is made. Follow my blog on the capital markets to learn more about how to analyse stocks and approach investments.