FAQ: My friend told me I should buy (fill in the blank) stock. He knows a guy who works there and says the stock is about to make a big move. What do you think?
Answer: There is a an old saying on Wall Street, if you want a million dollars, all you need is a hot stock tip and $10 million to start and you will have one million dollars by the time you are done.
There are only two potential reasons your friend would have a “stock tip”, the first is that this “friend” has inside information. If that is the case, you may want to take a tip from Martha Stewart and pre-set your oven for 6-9 months while you sit in jail contemplating your decision.
However, if we assume your friend is not unethical and has no information that would be illegal to trade on, I suggest you proceed with caution. I have been in this business over 20 years and have heard of dozens of stock tips received by friends and relatives. I am always intrigued to see the results because all participants who purchase the stock seem so excited; almost euphoric, as if they have figured out a way to beat the system. In truth, some have. Some of those tips have paid out pretty well, while others have floundered. In fact, after tracking for the last eight years, my experience has shown me that there is a 50/50 chance that your tip will pay any dividends. Yup…50%.
That means that you are just as likely to have success flipping a coin on a stock as you are in investing based on a stock tip from a friend. Unless insiders have information that would be illegal to disseminate (inside information), they are not telling you anything the rest of the world does not already know. The information you friend has about a company is nothing more than an affinity for her company, product, or service. Although it sounds relevant to investing, it usually is not. If your friend had any real information worth purchasing the stock on, it would be illegal to share it.
At Zynergy, we encourage our members to invest no more than 5% of their investable assets in these types of investments (if any at all). Stick with low cost index funds over time and you will be amazed at how well compounding does for you. That is the best “hot tip” we can give you.