How NOT to Pick Stocks

Quite a number of emails to Financial Expert concern ‘stock picking’ and how to beat the market. Let’s try to address a few (popular) bad habits picked up by investors around the world.

1. Do whatever Jim Cramer tells you to.

 

Jim Cramer has three great skills; talking fast, making alot of noise and contradicting himself.

Pundits like Jim look at activity in the markets, news reports etc and extrapolate them to create buy and sell signals. In reality, this creates far too many trade signals, and is often outright contradictory. The benefit for Jim is that he can defend almost all of his calls. When Lehman Bros crashed in 2008, Cramer was recommending everyone buy that stock in the months and weeks leading up to it. This was clearly a terrible call, but Jim Cramer defends himself by saying ’1 week before Lehman Brothers collapsed, I told everyone to get out of stocks’. So by issuing contradictory advice, he can ensured that retrospectively he apparantly protected his viewers investments.

If an investor actually followed every piece of advice from Jim Cramer, they’d incur enough trading fees and bid-offer spread costs to sink a ship. All positive returns would be wasted through all the excessive churning of the portfolio.

2. Invest in ‘Hot Penny Stocks’ that get advertised on leaflets through your door.

Such leaflets are examples of ‘Pump and Dump’ scams, whereby criminals buy shares in a small and infrequently traded company, then promote the stock heavily through cold calling and leafleting, and sell the stocks when the price spikes as a result of the investors interest.

3. Use family a gathering as a good opportunity to pickup tips on investments from ‘money smart’ relatives

Stock picking and family is a nasty combination. If you ever want to experience the definition of ‘awkward’, try acting on a stock pick from a friend which subsequently loses you $500.

I always avoid giving specific recommendations to friends and family, and in the same way, you should never ask for them! Asking for a stock pick gives them a lose – lose situation. If they pick the right stock – they don’t make any money. If they pick the wrong stock – it may cause a strain on the trust between you. In such a way, I believe its quite unfair to pressure friends a relatives into giving you specific investment advice, as it puts the relationship at risk.

How to Pick Stocks

If you want to actually achieve a good return on your portfolio, ask yourself “Do You Need a Financial Advisor?

 

Simon OatesHow NOT to Pick Stocks