Don’t trust your friends for stock advice

This happens to me frequently and it likely happens to you. All of my friends know that I manage my own investing and so they are constantly giving me tips. They tell me about the latest hot company or the industry that is going to explode soon.

It happens almost any time that friends gather together. I see them at a card party, watching the big game at the local sports bar, or the wedding reception of a friend’s child. The conversation invariably turns to investing because they know my passion for the subject. They decide to give me the latest “hot tip” on a stock.

I rarely take the word for it. In fact, I never take the word for it. I will put the stock through my filters that I describe in my book, The Confident Investor. I judge them by the following criteria:

  1. The growth of the company’s sales.
  2. The growth of the company’s earnings per share of stock outstanding.
  3. The growth of the company’s market value compared to its earnings.
  4. The growth of the company’s earnings before taking into account interest and taxes.
  5. The value of the company compared to its earnings as compared to other similar companies.
  6. The productivity of the company employees relative to industry averages.

If the company survives that gauntlet, I start tracking the stock with my technical analysis tools to find a good time to invest. I want to buy the stock when it looks like the price is increasing rather than when the price is falling. This allows me to Grow on Other People’s Money (GOPM). I will also put the stock on my Watch List for others to learn about this new company.

Right now there are about 50 stocks on my Watch List. If you need to find another stock as an investment, I suggest this list. The list covers a huge cross-section of companies from retail to manufacturing to services to communication to computers to finance.

Be polite to your friend turned stock analyst but don’t just jump into the stock. If you want to learn how to evaluate that “hot tip” then you can buy my book, The Confident Investor, wherever books are sold such as Amazon and Barnes & Noble. It is available in paperback and ebook formats such as for the Kindle, Nook, or iPad.

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