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Weekend Newsletter for May 26, 2007 Please forward to a friend! (Subscribe)
The Week At A Glance According To The Charts
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A Hot Tip
A Hot Tip -- by Bill Kraft
Copyright 2007, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
While on a commercial flight a week or so ago, I met a man who told
an incredible story. He had asked me about myself and I told him I was
a trader and that my book on stock and options trading was going to be
in the stores in December or January. He replied that he was quite
fortunate and had made a lot of money in real estate and penny stocks.
Real estate didn't surprise me, but penny stocks took me aback.
Evidently this fellow had been buying penny stocks for quite some time
and like many penny stock investors, had been a regular loser. Several
years ago, he was at a seminar and one of the other attendees told him
about a company that had a product that was half the cost and had twice
the life of the competitors' product. My seat mate bought several
thousand shares of the stock at 7 cents a share. The company hit and my
new friend sold his shares for $28. "Oh, by the way," he said, "we've
been flying over my ranch as I told you this story." Well, it had not
taken very long to tell the story, but the plane was flying at about 500
miles an hour so I can attest that it was a big ranch.
Can it happen? Of course it can. Luck can play a significant role
in any given trade. My neighbor on the plane was very lucky to have
received the tip and he was astute to realize the potential of a company
with a product that is way ahead of the competition. He made a fortune
on a tip on a penny stock. I would urge you not to count on the same
fortune by relying on tips, alone. I am constantly amazed by the number
of people who tell me they bought some stock or other and when I ask why
they reply that they got a tip from their brother-in-law or a friend at
work or someone in a store. While I do not deny that occasionally such
a tip may pan out, I find that they are abject failures most of the time.
Unless the tipster has some real insider information (which would
be illegal to divulge) he does not know more than anyone else and he was
probably pretty far down the line getting the information. Chances are
that by the time the information is passed to you the market has already
priced in the information your tipster has. Even a broker
recommendation (tip) may not be particularly helpful. How many other
brokers in the same firm have told their clients the same thing? Where
do you fall on the list the broker is calling? How many other firms
have the same information? In the old days, some firms even had a
'stock of the day' that their brokers were supposed to push.
The point is simply: do not act on tips alone. A tip, no matter
what the source, should be a starting point only. If you do hear a tip,
analyze the information that forms the basis. If it is a new product,
for example, does it sound like something that may enjoy widespread
popularity or is it likely to have a very small following (no calorie
ice cream vs. a tiger training kit)? How long has the information been
out? How does it stack up against competitors' products, etc., etc. If
you remain convinced that the company's prospects look good, is it the
right time to enter a position? Suppose the stock price has already
quadrupled and volume has begun to fall off. In addition, the price
pattern has formed a Japanese Candlestick "evening star." That might
not be the best time to buy. The volume already increased dramatically
as the price rose, but now the price seems to be stalling and volume has
dropped off. Are the great majority of buyers already in? If they are,
what would make the stock go higher? Probably nothing except a new
spate of good to great news.
One sage piece of advice I received is to be careful to whom you
listen. I would add that after listening, do some of your own homework
before putting your own cash at risk.
Good Trading!
Bill Kraft
Mr. Kraft's past articles are posted on our website for your review.
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