Barbara Bayer is renewing her soul (or is it her backhand?) this week. But, this Foolish classic, which originally ran November 23, 1999, is good advice for both tennis players and meditators. We are all susceptible to the lure of the hot stock tip, but there is no excuse for not doing your homework and making your own decisions.
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Like the apple in the Garden of Eden, hot stock tips dangle before you, offering promises of unimaginable riches. As a Fool, you tend to the Garden of the Long-term Portfolio, arranging your landscape with great care, watching patiently as the well-researched and chosen seeds bloom into richly rewarding flowers.
Until that one day when your eye spots the lustrous, seductive apple being offered by a self-confident and dapper snake. "Eat me," it calls to you. "I will make you rich and happy."
The hot stock tip is offered by a variety of reptiles. A broker calls attempting to capture your business by offering the next Microsoft; your first cousin once removed transfers to a new company that, in his opinion, is the next Intel; a mysterious stranger on a stock message board boasts a 250% annualized return and swears this company will be the biggest thing since slicedbread.com.
A myriad of reasons lure you into believing in the possibility. Don't get this Foolish Eve wrong; an occasional "hot tip" may indeed pay off. But, most will not. A hot stock tip is a blind prediction of a stock's potential short-term momentum. Most of these tipsters tell you to buy now, or you'll miss the magical run. No time for research, no time for consideration, no time for the bathroom. And, if the stock descends, the snakes mysteriously disappear, only to reappear in another guise dangling a new, shiny apple from behind yet another tree.
Consider the following results of these hot stock tips culled from our message boards.
From the Specialty Care Network board:
"I bought SCNI in July on a 'hot tip' from a friend who is an orthopedic doctor, which alone qualifies me as a real fool. At that time, I had not been introduced to The Motley Fool, so [I was still] listening to the Wise; I jumped in on the stock because it was rumored to be ripe for a takeover. Needless to say none of this happened. As a matter of fact, earnings reports for 1998 were worse than expected, and the stock took a 50% drop in one day."
SCNI Price on Hot Tip Day (7/1/98) $6 5/8
SCNI Price on 11/23/99 $3
The SCNI apple was rotten. Lesson: Only listen to your orthopedist about orthopedics!
From the Bid.com International board:
"I'm down over 70% in this stock (BIDS).... A hot tip from a brother-in-law and pressure from the wife got me into BIDS. I resisted because I had to sell my Foolish Fours. Well, what can you do, she made me do it."
Down 70%? Ouch! This sounds like Adam in the Garden. Lesson: Take responsibility for your decisions. Unless someone is holding a gun to your head, it is you and you alone who makes your decisions. Avoid this scenario by spending time researching before you buy, and having total confidence in your choice. This way, if the company doesn't succeed, you'll accept that you did everything in your control to make sure you invested Foolishly.
From the CMGI Inc. board (about a different stock):
"I gave my sole hot stock tip: Western Gas Resources (WGR).... I personally don't own any WGR because the terms of my employment prohibit it."
WGR Price on Hot Tip Day (6/3/99) $12 11/16
WGR Price (11/23/99) $12 7/16
OK, so here's a hot tip that didn't end in disaster. For a while it looked pretty good, even trading as high as $19 in late September before weak earnings brought it back to Earth. Note: be careful with a "tip" like this. Sometimes, a seemingly innocent tip can be a case of an insider giving too much information and violating insider trading laws.
It is illegal for insiders to trade based on their knowledge of material corporate developments that have not been announced publicly. Developments that would be considered material include news of an impending takeover, introduction of a new product line, a divestiture, a key executive appointment, or other news that could affect the company's stock positively or negatively.
Insider trading laws have been extended to other people who have knowledge of these developments, but are not members of management, including investment bankers, lawyers, printers of financial disclosure documents, or your Uncle Joe who happens to work at the place and learns of these material developments. Gently ask Uncle Joe to keep his mouth sealed -- if you want to visit him at his home on Thanksgiving and not in Leavenworth.