Philip Carret: Why Investors Should Avoid Stock Tips

In his great investing book, The Art of Speculation, Philip Carret provided some great insights into why investors should avoid stock tips, saying:

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If a trader could select the stock which is to be the star performer for the next week or two, take his profit on that and move on to the next, he would actually find the stock market the road to fortune that many people think it is. How shall the trader select of the thousand stocks traded in the one issue which will have the largest movement in the next week or two?

Nothing short of omniscience will enable him to do it. Yet this is exactly what thousands of traders are constantly trying to do. Impatiently they jump around from one stock to another taking a small profit here or a loss there and doing no better in the long run than make commissions for their brokers.

A psychological factor here enters. Having no sounder reason for his purchase than a tip the average trader has little courage and is easily frightened into taking small profits. On the other hand, he is stubborn enough to feel that any stock he has purchased must at least be worth what he paid for it.

He is likely, therefore, to hold on grimly in a declining market and at the end of the year find that it took a good many five or ten-point profits to offset a few twenty and twenty-five-point losses, commissions, transfer taxes and interest charges.

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