How to Find Experts
When it comes to picking stocks, which is more important, what you know or who you know?
Both, of course, but a great tip from a credible source is rare. Most of the time you have to research the company yourself, or take a leap of faith with the person who gave you the tip.
Today we will take a look at the "who you know" part of the equation. How to navigate the DD (due diligence) process is a subject for a separate column.
Let’s start by excluding any sort of "insider" information. Insider trading profits can land you in jail years after the actual trade. Don’t take the chance unless you like living overseas in a country with no US extradition treaty.
OK, so you just got a "hot" stock tip from Jim. Maybe you got it over the water cooler at the office, or Jim called you up to share the good fortune. Or maybe Jim is someone you see online a lot and like to follow.
Where do you start? It may seem obvious, but you have to DD a person just like you DD a stock. Who is Jim? Do you have any idea if he is a reliable, standup guy? Does he have any track record at all picking stocks successfully? If not, go straight to the "what you know" DD process.
Look at the stocks Jim picked before and see if they went up. Equally important – did they stay up for long? If Jim likes pump and dump trades, stay out. He already bought his shares and now he is looking for someone to sell them to at a tidy profit. Several subscription-based stockpicking services play this game.
Let’s assume Jim is a straight shooter. What is his time frame for the pick? Is it going up next week on good news or earnings, or does Jim like to buy and hold for a few years? Your time frame may not match what Jim has in mind.
Jim’s industry expertise is another issue. Sometimes it is actually not very helpful to have an "industry expert" picking stocks. They get so caught up in the technical minutiae of one system or another that they lose any sense of how the market will react to a new product.
Put simply, a better mousetrap is really no good for investors if buyers don’t bid up the shares in anticipation of future profits. You can also go blind reading lengthy messages on the latest development. "The HY758XE interface is clearly the industry leader, outmultiplexing the JK657WOW system by .87569 microseconds in a 100MB Ethernet environment."
Should you invest in that one? Beats me.
Say you follow Jim’s tip and buy the stock he likes. Do you sit back and wait for the inevitable double? Not if you want to hang on to your hard-earned money. Watch how the stock is trading, especially if it was hyped on a lot of Internet chat boards. If the share price spikes and starts to fall, take some of your money off the table (or take it all if you really don’t feel comfortable). Nobody gets poorer taking profits.
What do you do if Jim’s great stock pick doesn’t go up? Always have a mental stop loss level in mind and sell if the company falls that far. There are thousands of other stocks you can buy next. Don’t ride a loser unless you really believe in the story. Even then, you may be looking at "dead money" for weeks or months. Are you ready to give up the profits you could make with those funds somewhere else?
In the end, the only person responsible for whether you make money in the market is the person with access to your online trading account password. You can always find the "guilty party" in a losing trade - just look in the mirror.