Trading on tips

Advice on trading based on tips

If I could only give you one golden rule to investing that will save you money in the future then it would have to be this: Never ever trade on tips!

It's really simple. If you're down in the pub, chatting to your friends and someone mentions any sort of investment and financial product - the guaranteed thing; the thing that's going to make you rich - do not ever take your friends word as sound financial advice. I don't care how close you think you are to this friend, or what level of success or experience they've had at making money, do not make any transaction purely based on what your friend says. Too many people lose money this way.

I read about Aviva as the next great investment of 2011 back in December of 2010. Not only did I hear about the share from friends but read about the share being tipped in The Times and also on a well known share tipping website. I rushed into the share buying £500 worth...The shares fell by about 20%. I read a little more about the shares and how they were going to be the next great investment. I bought £500 more and justified it to myself that I was averaging up in the long run. The shares fell some more and continued to do very little over the following years. In mid-2012 I sold all my shares, crystallizing a loss of about £150 and reinvested into a mining company  that has since made a 40% return to date. I learnt that there is nothing wrong with crystallizing a loss if you think you've got a good alternative investment. Another early blunder in my investing career, based on a tip from a friend is detailed in a previous post. Please save yourselves the money and don't invest on tips: not even on my tips!

How do I invest if not on tips?

When someone says there's a really good investment, or you read about a share being tipped, go and find some objective evidence and make an impartial judgement. For example, go and look at the financial statements of the company. Ask yourself, how has it done over the last few years? What reasons would I have for investing in this company? What reasons should I not be investing? Be sceptical and you shouldn't go too far wrong.

The problem is that people aren't trying to con you out of money, it's just that they like to sound cleverer than they actually are. They make sweeping statements to sound knowledgeable about a subject. Try to cut through the bullsh*t and see the truth.

So it's simple - unless your friend is Warren Buffett then do not take their advice as truth.

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