CALCULATED RISK: It’s possible to manage your own investments, but only is you do your homework, says one independent Kootenay investor.

If you invest in stocks, then there’s a good chance that you’ve bought based on the ubiquitous stock tip. Whether it comes to you from your neighbour or a long list of strangers, it always fall into one of three categories: good, bad or ugly. Recognizing a tip for what it is can mean the difference between a big payout and a big disappointment.

The good tip is one that is known publicly but ignored because it requires some analysis. The information it contains should be verifiable without having to speak with company executives. An example would be: “I heard that ABC Co. has just begun a major hiring campaign.” With a little research, you may soon discover that ABC Co. bid on a major building project a while back. So, by putting two and two together, you have a solid gamble that the stock of ABC Co. is ready to go up.

A bad tip is one that cannot be verified. For example: “My brother Mike is a V.P. at ABC Co. and he was just informed they’ve won a major contracting bid.” This type of information could be true or false, but since it has not been made public there is no way to verify it. In fact, trading on this sort of tip is not only a bad idea, but it’s also illegal. In 2002 Martha Stewart was indicted for insider trading when she received information from her own broker that the CEO of ImClone had been trying to dump $5 million of his shares in his company based on insider information. All Martha had done was sell her shares on the knowledge that the CEO had tried to sell his shares.

Admittedly, such convictions are rare. However, investors should also be wary of unverifiable tips because they can be ugly too.

Ugly tips also go by the descriptive term “pump n’ dump.” The tipster in this instance is generally looking to cover a loss by manipulating the stock price in the short term. Pumping up a stock’s price on false information has taken on a new form in the case of Internet message boards. Very recently, a bogus news story was posted online regarding Crystallex, a Canadian-based mining company. The stock jumped 10 per cent on the fabricated news that the Venezuelan gold mine had finally been awarded a long-awaited permit. A few investors sold up at the top, while the rest were left holding the bag as the stock dropped.

Do your homework
They say gambling is the absence of control over a desired outcome, which is why calculating the upside and downside to every stock tip is crucial. Unless you have some understanding of a company and some hard evidence pointing to their future prosperity, you are gambling without any control.

Since Fair Disclosure Regulation was introduced by the Securities and Exchange Commission in October of 2000 greater control has been put into the hands of the individual. As a result, the playing field has been levelled substantially. All information regarding the health of a company must now be disclosed to everyone at the same time, not just the big money managers. And thanks to the Internet, it is now possible to find all this information summarized on Yahoo!, CNBC or Google Finance.

Because you are privy to the same information that professional money managers are, there is no excuse to skimp on the homework. All you need is the ability to read a company’s financial statement, gather some insight into an industry sector, and then the time and inclination to put it all together. It shouldn’t take you more than an hour or two per week per stock.

Come up with a plan
Before you purchase, always formulate a plan and stick to it. Determine beforehand whether you are entering into a trade or an investment. It is fine to do both at the same time, but never on the same stock. So, what’s the difference? A trade strategy predicts a stock to move up or down due to a certain catalyst within a definite time period. Traders focus almost exclusively on the catalyst and timing. “Swing traders” hold positions anywhere from overnight to a few weeks; “day traders” never hold a position overnight.

If you’ve entered into a trade and the catalyst hasn’t occurred but your time frame has ended, get out. If the catalyst does occur, take your profits. Never enter into a trade and turn it into an investment. Investing strategies focus almost exclusively on company fundamentals and economic cycles. If you’ve bought in as an investment, don’t wait around hoping your dead stock will one day rebound. Research the company and make a shrewd estimate of the upside. Then, either average down or get out.

Finally, always beware of the word “hope.” Winning stock strategies are based upon the critical analysis of facts and numbers. The phrase: “I’m hoping ABC Co. wins that big building contract” betrays an emotional attachment to the stock. Unless you have solid reasoning why ABC Co. will win the contract, you’re basing a risky gamble on nothing more than hope.

The bottom line is that managing your own investments always requires homework. If you’re not willing to spend the time doing the legwork, then you’re better off handing your money over to a mutual fund.

Joel Kaiser worked for many years in humanitarian development and disaster relief in Africa and Asia. During his downtime spent back in Canada, he pursued an education in investing. He currently resides in Cranbrook and can be reached at joelkaiser@gmail.com.