Why I don’t usually give or ask for stock tips

Posted by Lee Chee Keong on 15/12/2009 under Chee Keong, Investment | Be the First to Comment

Here are some of the reasons I don’t usually give or ask for stock tips:

(1) The tip-giver may be wrong;

(2) The tip-giver may change his mind about a particular stock. For example, the prospect of the underlying company may change, for better or for worse;

(3) The third reason, perhaps the most important reason, is that for an investor to do well, he must have the correct attitude and mindset toward investing.

I believe in “self-reliance”, no matter what I invest in. I only invest in things that I understand. It doesn’t matter that there are very few things I understand, as long as I stay within my circle of competence. As time goes by, my circle of competence expands.

It’s important that I do my own research and decide for myself which company or what financial instrument I want to invest in.

The greatest investor of all time, Warren Buffett, once said that if a person cannot stand to see share prices drop by 50%, that person has no business investing.

That means an investor should do his own research. It also means he should stay away from leverage.

If I had done my own research, that alone will give me the confidence to hold on to a company I had just bought if the share price drops by 50%. That is if my research shows that the company is worth more than the price I had initially paid. I will be in a better position to decide the action, if any, that I should take.

In my experience, stock markets often behave in an irrational manner in the short to medium term. An undervalued company can become even more undervalued a few weeks or a few months later and vice versa. A rational investor can take advantage of such price actions.

An astute investor can often tell, with a high degree of accuracy, that a particular company is worth “much more” than a particular per-share price. The difficulty lies in the fact that most of the time, it is almost impossible to predict whether the company will continue to be undervalued or become even more undervalued in the short to medium term. In the longer term the share price will rise to reflect the intrinsic value of the company.

Trading or market timing can be highly profitable in certain situations but for most people the surest and easiest way to make a profit is to ignore the short term volatility and invest for the long term.

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