Over the last few hours, I’ve heard some great stock tips!
Greetings from the Money Show conference, held at the Omni Resort at Champions Gate in Orlando Florida.
This week’s line up of speakers includes some brilliant investment minds including Ed Yardeni, Steve Forbes, Stephanie Pomboy and many more. I’ve enjoyed the conference so far and can’t wait to see what I’ll learn over the next two days.
As I was taking notes during one of the presentations, I started thinking about how to use these stock tips.
Any time you hear a stock tip from anyone — myself included — there are a few basic questions you should ask. This way, you can better decide if the stock tip is right for you — and how it might fit with your own investment approach.
Here are the 5 questions I came up with. Drop me a note and let me know what questions you like to ask whenever you get a hot new stock tip.
1: What’s Your Time Horizon?
The person giving you a hot stock tip could be a day-trader — or a long-term investor.
Sometimes the stock recommendation will play out immediately. Other times, it could take years for a situation to pan out.
And if you’re not sure which type of play this stock is, you could miss out on the opportunity.
Maybe you’ll sell a long-term play too quickly. (Because it “didn’t work” in the timeframe you expected.)
Maybe you’ll lock in a small profit and be perfectly happy — until you see the stock move 10X higher over the next 5 years.
Make sure you understand the time frame that a particular stock picker is using!
2: What are the Company Fundamentals?
All too often, people get excited about a company’s products or some other factor. But they don’t actually figure out what the stock should be worth.
Your job as an investor is to understand the fundamentals before you buy.
How much profit does the company generate?
What is the growth rate?
Are there competitors in the space?
How much debt? When is it due? What’s the interest rate?
Get in the habit of digging into the fundamentals of the companies behind a hot stock tip. You’ll make far better decisions when you understand what you’re actually buying.
3: What is the Stock Tipper’s Motivation?
This one is important.
Some traders “talk their book” — hyping a stock they already own. The motive is to get other investors to buy. That way, the stock price hopefully moves higher.
In some cases the motivation can be even more cynical. Less scrupulous investors can tout stocks publicly while selling in private. That way, there’s more demand for the shares they are trying to unload.
Many times the stock tipper just wants to sound smart.
Maybe he or she is well intentioned, but is more interested in gaining your respect than making you money.
There are many reasons for someone to give you a stock tip. If you understand the motivation, you’ll be understand the context for the tip.
4: What is the Macro Environment
Even the best stock tips won’t work in the wrong part of an economic cycle.
Today, our economy is on the brink of recession. Inflation is high, the Fed is hiking interest rates, and consumers are worried.
That’s not a good situation for expensive growth stocks.
But it can be a great season for value stocks that generate reliable profits and pay generous dividends.
The more you study the macroeconomic environment, the more skill you will have at selecting which stock tips make the most sense.
5: What is the Underlying Trend?
Is the stock moving steadily higher? Is it oversold and due for a bounce?
What about other stocks in the same industry?
Investing when the trend is on your side can boost your win / loss ratio. And more importantly, it can help you collect larger profits as your winning plays keep advancing.
Yes, trends eventually end. And there are times when it pays to be a contrarian.
But for the most part, investing alongside the broad market trends (or specific industry trends) will serve you well.
Those are my 5 instinctive questions to ask for every stock tip you hear.
I’d encourage you to ask those exact questions about tips on my own watch list — which I update regularly.
Consider subscribing with the link above, and then check through the 60+ names to see which of these plays make sense to you!
Here’s to growing and protecting your wealth,
Zach
