Common investment mistake No 1. By Darren Winters

ACTING ON ADVICE / A TIP FROM SOMEONE WITHOUT FIRST CHECKING IT OUT YOURSELF

Share tips from friends, stock brokers or in magazines, can be extremely valuable, but at the same time you need to have the knowledge to be able to evaluate how good (or bad!) the tip is for yourself. Acting on a hot tip without doing your own research can be very dangerous (not to mention costly!) My general rule of thumb is that the hotter the tip the more likely you are to lose money investing in it! If I had to guess I would say that about 9 out of 10 of the hot tips that people have given me have done exactly the opposite to what I was told they should do. (Tips can often be a very valuable resource for a contrarian trading strategy – but that’s another topic)I’m sure most of you have your own stories (or have at least heard someone elses) – “This share is a sure thing” (alarm bells should start ringing!), “Not many people know this, but this company is about to _____” (any of the following could fill in the blank – “get the go ahead for a new product”, “announce great profit results”, “be taken over by XYZ company”, plus any other great story you’ve heard!) Occasionally there may be some truth in the story, but you need to do at least some quick and simple research on the company that has been tipped before investing any of your money.

How to Avoid: Acting on advice / a tip from someone without first checking it out yourself

Two things that you would be wise to have a quick look at (this is just a refresher for those of you who have been on my 2 day training course): The company’s fundamentals: By fundamentals I meant the company’s financial facts and figures. At the very minimum, check that the company’s yearly profits and sales growth figures are reasonably healthy (i.e. positive and increasing). To get more advanced look for the following: yearly profits growth 20%+, yearly sales growth 15%+, and net profit margin 10%+. An easy way to do this for a UK company is by going to http://www.comdirect.co.uk/ and for an American company go to http://www.quicken.com/ and typing in the company name. The other thing that I would consider essential before purchasing any shares is to look at: The company’s Share chart. If you see anything that looks a bit similar to the five shown below on this page, that is generally a good sign that the share price has more chance of going up than down (you can certainly get more advanced than this but it is good to get familiar with the basics first). The charts are in order of their reliability, with the last chart pattern the most reliable
– after you see the section marked on the chart, the share price is more likely to continue up, than go down.Now turn the page upside down, if you see a chart that looks like any of these, the share price is now more likely to go down.

http://www.darrenwinters.biz/images/doublebottom.jpg

If all you do is check that the company you are considering has strong profits and sales growth and a half decent looking chart, you are already ahead of the vast majority of uneducated ‘investors’.

Darren Winters