Why you need to avoid ‘hot tips’ when investing

By Brett Kelly

June 01 2020
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“Everyone’s on it, this cannot fail.” Anyone who has even contemplated investing has heard words to that effect at one time or another. These are usually the ones that come with an absolute cast-iron guarantee of success, bringing you quick and rich rewards with little or no risk.

Occasionally, someone gets lucky. But I do mean lucky, because jumping on a bandwagon like that is fraught with danger. To have any hope of sustained, long-term success in investment, it’s vital to find out as much as you can about what you plan to invest in. Do your groundwork.

Who is the source?

The first thing to ask yourself if you’re given a so-called hot investment tip is “who is the source?” How well do you know them and their track record, and how well can you trust them? If it’s coming from a news outlet, how trustworthy are they, who are the experts they’re using?

Bear in mind the vast majority of mediocre or poor investors are happy to wax lyrical about their wins but tend to keep very quiet about their losses. In my experience, successful investors are far from boastful and are very happy to admit to having made mistakes along the way. An investor who tells you they’re successful every time is probably a liar.

Anyone who has been in the market for a long time is very humble around the power of the surf; they don’t overestimate their ability to hold back the waves.

How far has the news spread?

Another immediate alarm bell that should ring is that a “hot tip” is highly unlikely to be some great secret; investors will already have been buying up stock and you’re in danger of coming in at the tail-end, overpaying and risking much smaller returns. You’re not going to make money simply by doing what everyone else is doing.

Good investment is not gambling. People who get easily swayed by tips often find themselves in a spiral of trading, making quick, impulsive buys and sales, reacting to every change in a volatile market. This is the surest way to lose your money. I’ve never had a client wish they’d sold a property – most wish they’d kept every property they ever bought.

A long haul pays off

One of Australia’s leading investors, Charlie Aitken, says short-termism is one of the most common investment mistakes.

“The biggest money you make in investing is by buying great companies, or fast-growing companies, and holding on to them... So, if I can avoid the noise that could make me sell one of those companies, or partially sell one of them, I will. You will always regret it.”

Do your own research

Research into what you propose to buy is essential. Make sure you know exactly what the company does, and its future growth direction and prospects. Try to remove emotion from the equation and make an objective assessment.

Jun Bei Liu, now extremely successful as Tribeca Investment portfolio manager, remembers an early misstep with a car radio company that taught her the value of due diligence. She saw the stock was trading well in a healthy retail environment and felt buying it ticked all the boxes.

“So, I wrote the report but didn’t visit their stores, didn’t experience the actual product,” she says.

When she finally did, it was far from what she expected.

“I went to the store and it didn’t look great. I thought, ‘Just trade it through’, but all you need is a tougher consumer environment and everyone tightens their wallets.

“I learned you have to see the product, touch it, feel it and really know the story. As an investor, you need to know the business as if you’re running it.”

That is the real hot tip – to develop a solid financial plan and to do your homework. The investment market is a turbulent world, but determine a strategy and see it through, avoiding panic because you have done your research and have confidence in the bigger picture of your investment. Those who act calmly, with cool, clear heads and who treat the market with respect are the people most likely to do well from it.

Brett Kelly is the founder and CEO of Kelly+Partners Chartered Accountants and a published author.

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