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Here's a hot stock tip

Don't buy hot stock tips.

Every now and then, a friend or relative will get a stock tip and ask me what I think about the company. In fact, I got one such request this week in an email. It went like this: “I have a question to ask you about a possible investment opportunity concerning P—. Can you do some research on it? I heard thru the grapevine that his company will come out with a HUGE valuation in June this coming year as their patents and IP are solidified.”

Several years ago, I might have been tempted to look up the company, and after discovering it was trading on the pink sheets or some other questionable stock exchange (as these hot tips usually do), told them there was too much risk. I don’t bother anymore.

Now I simply tell them I’m no longer a fan of buying individual stocks (at least in the case of non-professionals). And especially on the basis of hot tips, which often are spread by promoters and others who don’t have your best interests at heart. Even tips from friends, relatives or work associates should generally be avoided as they may unwittingly (or wittingly) be passing on the tip they received from a “pump and dump” operator or some other promoter type.

The shares in P— may well take off, but the next hot tip could take it all back and then some. And most investment guides recommend staying away from buying stock tips unless you’re a professional and are seriously into doing your own due diligence.

The Average Jane or Joe is better off buying exchange-traded funds (ETFs), which are baskets of stocks. As such, they spread the risk of any one stock torpedoing your net worth (and cost much less than mutual funds).