Stock Tips for ASX Investors

Novice investors are naturally drawn to the elusive stock tip. The lure of making a quick buck in the share market is far too enticing to ignore. When you can make 20%, 30%, or even 100% returns in just a few weeks, armed with only the right information, it is no wonder that the market for stock gurus is over saturated with experts. 

To be fair, the reason that most of us began trading in the first place was because the experts we envied implied that successful share trading could be mastered over their weekend course. In just five days, their graduates would be working part time from their laptop in the Bahamas. But inevitably, like moths to a flame, they get burned, and fast.

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Man asking for a Share Tip

Think About What a Stock Tip Actually is

A person who buys a share through hearsay (whether from an investment newsletter or tip from their best mate) does so for one reason. They believe the advice they have been given contains accurate information that the public simply hasn't cottoned on to yet. Unfortunately, that's the case only some of the time, and the opportunity is accompanied by substantial risk (which is ignored).

 

 

Tulip Mania

Tulip Mania

In 1636, Europe was caught up in the most peculiar of speculative bubbles. The tulip bulb (a type of flower) was traded in fever-like proportions.

At the height of the mania, one tulip bulb was worth 2,500 florins - ten times the annual income of a skilled craftsman. 

"I can calculate the motions of the heavenly bodies, but not the madness of people." - Sir Issac Newton

Nearly 400 years later, little has changed. People buy and sell due to emotion and greed; maybe not enough to sell their family home to buy a single flower, but the root cause remains.

Following Failure Comes Denial of Responsibility

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New investors who lose money in the stock market usually look for someone to blame. We saw this recently with the Facebook IPO.  Investors were threatening a class action lawsuit because an IPO didn't go their way. They bought shares in a company with a PE ratio near 100 (for the record, Apple has a PE ratio of circa 15), yet when the price fell rapidly after listing, they looked for someone to blame.

I'd like to ask them, "Was it your broker or your greed that forced you to buy shares in Facebook?" Chances are, they were buying due to a) greed and b) emotion. Greed and emotion are both poison apples to successful share investing.

How to Spot the Scammers

Scammer

Avoid anyone who openly implies that making money is not a long-term game. You will have good years and great years, as well as painful years. What matters most is your long-term survival, and making sure you incrementally grow your wealth over time. 

So get the idea out of your head that investing is about making a quick buck through share tips. As I fully accept (and you should too), a successful share investor is in it for the long haul, no matter whether they are short-term traders or long-term investors.

 

The World of a Stock Market "Expert"

A stock broker giving poor investment advice

I'm RG 146 compliant (i.e., I hold a licence to give advice in ASX securities) and I can honestly say that just because you have successfully passed a test, doesn't mean you have the faintest idea how to invest in the share market. Yet these “experts” are the same people you are entrusting with your money.

One of the first things I was told as a Junior Broker was a very simple rule. Always have two shares to recommend to a client—a big-cap and a small-cap. It didn't matter which direction the market was moving, you always had to have a share to recommend should you get a phone call. Obviously this sort of approach was based on maximising client revenue, not client returns.

 

 

Be Careful of "Gurus"

I once witnessed a confrontation in a major ASX share forum between a regular poster and a well-known Australian author. The poster confronted the author and asked, "Why should I listen to you, if you can't even prove you trade successfully in real-time?” The author countered with the defence that they were "educators" and, "if you're an expert tennis player, your coach doesn't have to be an A-grade player themselves". This defence is blatantly flawed. Successful share trading is a mental game, not a physical one. If I want to become a better chess player, I'd want my teacher to be better than I was. Period.

You wouldn't learn how to play chess from someone who doesn't play themselves. Yet when it comes to investing, new investors listen to those who can't prove (with evidence) that they trade with their own money. 

 

Conclusion

I once heard a great saying:

"Wall Street is the only place where people ride in a Rolls Royce to get advice from those who take the subway".

How true that is. Only listen to those that walk The Walk.

If you have a question, or simply want to share your story with me, feel free to contact me via the Contact Page. I read and reply to all emails personally and promptly. 

 

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Absolute Investor provides general share market advice only.

Absolute Investor Pty Ltd (ABN 92 153 809 075) is a corporate authorised representative of Cygnet Securities Australia Pty Ltd (AFSL 241095). As the website does not take in to account your individual financial circumstances, you should consider talking to a financial adviser before making an investment decision. For more information about our services, please read our Financial Services Guide. Past portfolio returns are not a reliable indicator of future returns. Investing in shares involves risk, including loss of principal. While this website has been prepared and is updated with due care and attention, economic circumstances change with time and therefore no liability is accepted by Absolute Investor Pty Ltd, its related entities, agents and employees for any loss arising from reliance on the information contained in this website.

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