Stock tips might totally go south and the investor can lose a lot of money. We know this, but this does not dither thousands of amateur investors to try their hand in this get-rich-quick scheme (which almost never works). In this post, I present a framework that will allow you to make huge profits i.e. if you become the stock tipper rather than the receiver of these stock tips
Everyday I receive scores of unsolicited stock market tips on my mobile phone. There are a quite a few templates out there but the most common ones read something like –
- Multibagger opportunity for Homer Biosciences Limited (539021) at CMP: 40.31 & TGT: 53. Return 54%. 3-4 months
- Infosys Limited. CMP: ₹740.65. Tgt1: ₹752.30. Tgt2: ₹765.15. Stop Loss: ₹734.4
I was always intrigued by the techniques these stock tippers employed to predict a target price and date.
My research started a couple months back with some books on trading and was further complemented with answers on Quora. I also scourged through blogs written by stock market participants.
I was hungry for information and even interviewed some sales executives at equity brokerages as they were closer to the ground with access to the end customer.
And by the end of it, I realised how the nature of stock tips have transitioned from being a friendly advise you might expect from a relative or colleague to a sustainable & extremely profitable business model.
How Stock Tips helped me earn over ₹100,000 in less than 2 weeks working for 30 seconds each morning
It’s the evening before the big day and I am ready with the essentials –
- A well crafted message copy
- A mobile phone (ofcourse)
- Whatsapp mobile application installed on the phone
- 10,000 mobile numbers which includes some ex-colleagues, acquaintances and finally, subscribers to an investment newsletter a friend had created last year (he has since shut down that newsletter but was kind enough to share his database for a 10% cut in the profits)
I wake up early at 6:30 a.m. to a most wonderful morning (the smell of easy money can that effect on me).
I finish my coffee, go for a jog and wait for the clock to strike 8 – my chosen hour when I unleash my latest intellectual creation on 10,000 benefactors.
At 8 a.m. I split the 10,000 phone numbers into two groups of 5,000 each.
- To the first 5,000 the message goes – Share price of Infosys is GOING UP today. 100% Guaranteed. From – Shankar @ www.awesometips.com
- And to the other 5,000 the message reads – Share price of Infosys is FALLING DOWN today. 100% Guaranteed. From – Shankar @ www.awesometips.com
One of these two events is bound to happen giving the tipster a 50% chance of success. Which means there’s going to be exactly 5,000 users who will be surprised at this accurate prediction not knowing that they had an equal chance of failing the test had they been in the other group.
Let’s say the Infosys share price fell yesterday in the stock markets. So I go back to the 5,000 phone numbers to whom I predicted correct, divide them into two equal halves of 2,500 each and repeat the process.
My weapon of choice today is the Reliance Industries share price.
- To the first 2,500 the message reads – Hurray! We were correct yesterday about Infosys. The share price of Reliance Industries is GOING UP today. 100% Guaranteed. From – Shankar @ www.awesometips.com
- And to the other 2,500 the message goes – Hurray! We were correct yesterday about Infosys. The share price of Reliance Industries is FALLING DOWN today. 100% Guaranteed. From – Shankar @ www.awesometips.com
And lo behold! The share price of Reliance Industries went up today which left me with 2,500 somewhat amazed users.
The winning phone book contacts were further split into 1,250 each and the process was repeated with Hindustan Unilever shares. By the end of the day, I was left with 625 users who had received three correct predictions in a row.
Day 4 – Start with 625. Halve that and we are left with 312 by end of day 4
Day 5 -Start with 312. That leaves us with 156 by the end of day 5
Day 6 -Start with 156. And we are down to 78 by end of day 6
The First Monetization
Day 7 – We now have 78 users who have received seven 100% accurate stock market tips in a row. It’s time to monetize and it starts with an enticing offer to these 78 users.
“7 stock market tips in a row & 100% accurate. Subscribe to Awesome Tip Pro package for just ₹1,000 and continue receiving stock tips everyday. Don’t miss out on this opportunity to make lacs #KnowledgeIsPower”
Let’s assume all 78 subscribe to this offer
They can earn lacs of rupees in easy money by investing a mere ₹1,000 in a daily education). So that’s ₹78,000 in the pocket (78 * ₹1000)
By the end of the day, 78 users would have dwindled to 39.
Day 8 – Start with 39 users who have had eight accurate predictions. And we are left with 20 by end of day 8
Day 9 -Start with 20. We are now down to 10 by end of day 9
Day 10 – Start with 10. Now we are in single digits with 5 left by the end of day 9
The Second Monetization
Day 11 – Let’s monetize once again, afterall these 5 users have been receiving correct tips for ten consecutive days.
We charge ₹5,000 this time around and assuming everyone subscribes for this premium package, we have netted an additional ₹25,000 i.e. ₹5,000 * 5
₹78,000 from day 7 and an additional ₹25,000 on day 11 gives me ₹103,000 in earnings. Easy peasy lemon squeezy!
5 goes down to 2 by end of day 11
Day 12 – We start with the 2 remaining users and by the end of the day we have our 1 survivor who has received 12 perfectly accurate tips in a row!
In summary –
- Earnings – ₹103,000
- Expenses – Nil
- Profit – ₹103,000
- Days taken – 12 days
- Time taken – 30 seconds everyday
- Expertise required – texting
QED (quite easily done), wasn’t it? 🙂
The above was a piece of fiction but the theory is entirely plausible and I won’t be surprised if this was the general practice employed by the mushrooming stock research firms across the country.
Intraday tips, currency tips, margin tips, commodity tips, F&O tips, momentum tips — there is no dearth of “experts” ready to peddle their intellectual wares to beginners in stock market trading and power-users alike.
If you liked the content above, do read three of my most-read articles on beginnersbuck.com
- How I Built a High Return-Low Risk Portfolio with Index Funds
- The Complete Investor Guide to Building Wealth with SIPs
- How Axis Focused 25 Fund became India’s Best SIP Mutual Fund
Are Stock Tips Accurate?
We will answer this question using simple math. However the answer to this question has psychology, probability and duration added to the mix.
Psychology of Stock Market Tips
First, the psychology part.
When you trade in equities, you are likely to view the entire exercise like an adventure. And like any adventure, you understand that there are unknown risks. This attitude helps your brain absorb any losses and condition your brain to think, “well, it was part of the game” (which is not a bad thing as it serves as an antidote to depression).
This same attitude also throws a bias towards your successes and you are more likely to remember the winners rather than the losers. So, if you have a friend who is into trading with stock tips, do be wary of the fact that he will have a favourable attitude towards stock tips because of his mental conditioning that trading is easy, profitable & exciting with easy and exciting being the overbearing reasons.
Rules of Probability to Succeeding with Stock Market Tips
Second, we examine the rules of probability as we seek answers to the original question.
The probability of you winning at a coin toss is 50%. This is what we did in our “How I Made Over ₹100,000 in Less Than 2 Weeks Working 30 seconds Each Morning” experiment.
Now, a broker’s worth is measured by his successes which means at the very least, he has to perform better than a coin toss’s probabilities.
I am reminded of Burton Malkiel’s premise in his bestselling book “A Random Walk Down Wall Street”. He says that a blindfolded monkey throwing darts at a business newspaper’s stock listing page could select a portfolio of stocks that would do just as well as one carefully selected by experts.
Recently there is some debate on this because statisticians have come forward and said that monkeys can do a much better job than both the experts and the stock market.
Stock broker predictions
Since we aren’t going to be satisfied with our share broker’s 50% success, lets toughen up the broker’s job.
Let’s expect a 75% success rate in his predictions.
I wanted to offer the stock research predictions enough time and opted for a 1 year prediction rather than a day or week prediction. A Google search for brokerage reports in the month of Jan 2018 revealed an article titled These stocks could give up to 35% returns in a year.
The Promise of Earning Upto 35%
This article featured 10 companies whose stock prices were expected to increase from 8% to 34% over the next 12 months. Infact, if one had invested ₹10,000 in the shares of each of these companies –
Your Investment = ₹100,000
Expected Returns = ₹120,806
Total Predicted Returns over 1 year = 20.8%
And what happened?
The predictions did not go as planned.
A one year performance review of these stock recommendations by leading brokerage and research firms of the country reveal that only 1 out of 10 predictions actually came true.
90% of the predictions missed the target by a mile or more.
So if you had, based on the article, invested ₹10,000 in each of the company’s share, you would have lost 42.2% of your wealth over the same one year period when the expert research predicted a 20.8% gain for you.
The actual performance of your investments would have been –
Your Investment = ₹100,000
Actual Returns = ₹57,772
Total Returns over 1 year = minus 42.2%
We will cover the reasons why the stocks fell so drastically over the 12 month period in a different article very soon.
Finally, consider the duration of the prediction when being presented with a stock tip.
Duration plays quite a big role and comes in many forms – intraday, weekly, monthly, quarter (3 months) and year (12 months). Rarely do these tips go beyond 12 months with intraday being the most predominant duration.
What are Intraday Trading Tips?
Intraday Tips are same day predictions given by the stock tipper regarding the movement of a company’s stock, futures, currency, foreign currency or related financial instrument.
The intraday tip follows a rather common template that contains a) Company name, b) Transaction type (i.e. buy or sell), c) Initiation range, d) Target and e) Stop-loss.
Intraday Stock Prediction Template
The stock recommendation will read some like –
Date : 22-Feb-2019
Type : Intraday
Stock : Reliance Industries
Transaction : Buy
Initiation Range : 1248.00-1252.00
Target : 1261.40/1273.80
Stoploss : 1,238.60
Stock tips include Buy and Sell calls with equal velocity.
It is very common now to see intraday tips broken down into morning calls and afternoon calls. Infact, a growing number of stock research agencies offer the tiniest of windows with 15 & 30 minute calls.
A recent advertisement on a website by a brokerage firm used the classic turnover example used by FMCG companies with retailers to suggest that you can earn 24% per day on your money which will translate to an earning of 2,888% (or convert Rs. 1 lac to Rs. 28.8 lacs in an year) with their awesome stock tips.
An Intraday Stock Tip Advertisement Format
Here’s what the advert said –
Your initial investment = ₹100,000
Calls duration = 15 minutes
Calls per day = 24 (representing 6 hours the stock markets are open)
Gain per call = 0.5%
Hence, Day’s Gain = 12% (i.e. 24 * 0.5%)
Number of sessions per year = 240
Total Gain for the year = 2,888% (i.e. 240 * 12%)
Your initial investment would have grown to ₹28,88,000
Total Profit for the year = ₹27,88,000
My larger concern is when consumers who are new-to-investing fall for such schemes and end up losing a large part of their wealth.
These advertisements employ many psychological tricks to convince beginners to part with their money and be a part of such get-rich-quick-and-without-effort schemes.
One trick used in selling work-from-home packages is to show a cheque with an insanely high amount. It shows that some parts of the cheque are redacted to make the consumer feel that this is a genuine cheque.
A Friend’s Hot Stock Tip is More Likely to Get You Burned
Often friends out on a drink or a colleague over lunch slips you the tip which he or she received from a credible source (afterall, this credible source had given his sixth straight correct tip earlier today).
If not lunch or drinks, there is the omnipresent Whatsapp and its numerous groups which will keep you impressed the hottest tip by the minute.
Before you decide to accept from your friend’s tip, ask yourself this question –
Who are you more likely to take a stock tip from?
The picture above shows two investors who have made billions of dollars on Wall Street using different investing strategies.
The man on the left is Jordan Belfort
Jordan Belfort– also known as The Wolf Of Wall Street, made his name in the late 1980s and early 1990s as the owner of Stratton Oakmont. At its peak, Stratton Oakmont employed over 1,000 stockbrokers and raised over $1.5 billion in capital.
Belfort endured a spectacular fall from dizzying heights when he pleaded guilty to fraud and stock market manipulation by pitching penny stocks to investors leading to heavy losses using boiler room strategies (a boiler room strategy is the use of banks of telephones by high-pressure salespeople to call potential investors to sell highly risky, speculative & even fraudulent, securities). Belfort spent 22 months in prison and published the memoir “The Wolf of Wall Street” in 2007. This was later adapted to a film with the same name starring Leonardo DiCaprio in the lead role.
Warren Buffett is the poster child of modern-day investing and is widely considered as the world’s most successful investor. As the serving chairman and CEO of Berkshire Hathaway, Warren Buffett has an estimated net worth of $84.9 billion as on Feb 12, 2019 making him the third wealthiest person in the world.
Benjamin Graham moulded Buffett’s investing philosophy. Buffett widened the definition of value with his wide use of discounted cash flow valuation methods and viewing businesses as franchises. If you are Buffett fan like me, I strongly advice the following two books to any and all investors –
Belfort v Buffett
Now, although Jordan Belfort and Warren Buffett have both seen tremendous success – the differences in their outlook, investment styles, spend patterns are at extremes.
Belfort’s play was on penny stocks, short term trading, high pressure sales, fast turnaround of money, self-before-others, luxurious lifestyle, media hungry and high risk. Buffett preaches quite the opposite with long term buys, buy & hold investments, berates speculation, frugal living, high on philanthropy and low risk.
The question for you will be – who are you more comfortable taking a tip from? Jordan Belfort or Warren Buffett.
How to assess your friend’s hot stock tip
So, the next time your friend starts something like – “This stock is trading at ₹14 right now. Next week, they are announcing their plans of setting up a chain of hospitals across India. The market for healthcare services is growing at 15% per annum which augurs well for this stock. Experts expect this stock to touch ₹100 by next year. I put in a buy order for 1,000 shares last week”. Just relax and ask yourself :
- How much does your friend know about valuation and other metrics?
- How much does he know about the healthcare industry?
- Is he a Jordan Belfort type personality or is he a Warren Buffett type personality? (if they don’t know who Warren Buffett or Jordan Belfort is, then you are better off ignoring your friend’s stock tip)
Indore Stock Advisory and Research Firms
India has it’s own version of Stratton Oakmont in the form of dozens of mushrooming stock ‘research’ and advisory firms in the city of Indore in Central India.
These Indore stock brokers have a simple operating model. They use pressure hard-sell tactics to get investors to subscribe to their intraday trading packages. Boiler room tactics include playing different roles on the floor, offering trial packages, communicating only when bets go right etc.
As a rule, always say NO to tips.
We have seen how unscrupulous elements spread disinformation to manipulate stock prices using Whatsapp & Facebook. Always question the source as it’s possible that your friend too might have fallen prey to a stock tipper’s glorified & immoral practices.
Do your homework yourself and spend a couple of hours in analysing the company. I shall be posting many more articles on how you can analyse companies better which can give weight to your decision of investing or not investing in a company.
It is always a good idea to understand financial statements and the broad mechanics of the industry where this company operates.
Warren Buffett quotes have been used in a number of forums. One of his not-that-famous but apt short verse is “Trust But Verify“.
So, feel free to soak up to any ideas thrown at you but don’t act upon it until you have researched the same
Remember, if you ever need a helping hand, it’s at the end of your armAudrey Hepburn
Here are some articles you can read to get better details on financial and stock metrics