Picking stock: "Who to believe?"

     After you read "Picking Stock: Myth" and accepted "Stock" as one of your choices of investment, we will confront the next obstacle: myriad of stocks is waiting for you! You will get confused where to start. Consequently, someone bought the book about investment and hoped that it will help them understand how to begin investing in stocks......however some people get confused more than before they read that book. Since most investment books include all information you should know, but do not order what you should know first and last, it is difficult to catch the core knowledge of investment without the right order. Some readers bought the book and never touched it again, because there are too much information in the book. I always believe that 1 is better than 100! I mean if the book has 100 chapters but we never read them, those 100 chapters are worthless, right? even though they are very useful. So, catch the kernel of investment first, and later care for the shell.

     I have a simple way to pick the stock without knowing the balance sheet, economic cycle, financial ratio, etc. ( I did not state that these information is not necessary, but I just want to show you the simplest and clearest way how to prick the stock yourself, then you can study more later)

     However, before you believe me, I would like to introduce other groups of people that might have an influence on your decision on picking stocks.

1. Stock broker
2. Investment advisor
3. Family and Friends (FF)

    - The difference between "stock broker" and "investment advisor" is that stock broker will recommend you only about stock but investment advisor will give you a broader suggestion and might be able to suggest you to invest in other assets other than stocks.

1. Stock Broker

     After we open a stock account, a stock broker will be the person who takes care of our investment. Once, I was talking with one of my customer ( I used to work in the mutual fund company). Let me name her Mrs.A. Mrs.A told me that her stock broker recommended her to buy telecommunication stock, because it was likely to increase in the next 3-6 months. Mrs.A decided to buy the stock as she was recommended. However, with full of anxiety, she came to ask me whether the stock she bought was good.....

I asked her
"Do you know anything about telecommunication business?"
She answered
" It is about telephone, I think." I further asked her
"Did your broker tell you why the stock would perform well in the next 3-6 months?"
"No, I just believed him" replied Mrs.A.
My last question was "What would you do if the stock's price was down?"
She reluctantly replied " I would sell it."

     The purposed of the dialogue above is....

     - Mrs.A bought the stock with her broker without any knowledge about the stock she bought. She bought the stock because she completely trusted the stock broker. This is wrong!

     - Mrs.A should know the income structure of the broker that the broker's income was tied to the volume of Mrs. A transactions both buy and sell. So, there is conflict of interest that Mr.A should beware of. For instance, the stock broker might encourage Mrs.A to trade the stock with an unjustified reason.

     - Mostly, in the broker house, there is the research department works closely with the stock broker. The information that brokers use to recommend customers mainly comes from the research department. It is too risky for the brokers to recommend the stock to the customer themselves. Therefore, the stock that the broker recommend to you is not based on your background, but on what the research department is interested. So, stock broker may not be the right choice for you to believe and help you finding the right stock.

2. Investment advisor

     Investment advisor (IA) will give you a broader view than stock broker. For instance, IA will ask you list of questions and analyze those questions, such as your purpose and risk tolerance. Moreover, IA's suggestions are not limited to the stock, but also other assets. However, some IAs have the income conflict of interest like stock broker, but some do not. (So, the scope of IA will be limited only with no conflict of interest)
     Therefore, IA might be more reliable than a stock broker under no conflict of interest assumption. Nevertheless, IA still could not help you to stand on your feet and have enough knowledge to pick the stock yourself, because...

     - Several times, IA will allocate your stock portfolio to "stock mutual fund" ( You can read about "Mutual Fund" in the "Intro" section). The reason maybe the low cost or the simplicity of the mutual fund which I do not see it wrong, but it will not generate you any knowledge how to pick the stock yourself.
     - Even though IA recommend you individual stock (not mutual fund), IA tends to give you sets of stock categorized by IA's experience, such as group of dividend stocks, growth stocks. Again, this way will not generate you a knowledge about picking a stock.

    - Last, if IA suggest you individual stocks, they will based on IA's experience (not yours). Moreover, the cost you need to pay IA in this case will be higher, because they need to analyze the stock for you. (extra work=money)

     In sum, IA is still not the person whom you could believe and follow.

3. Family and Friend (FF)

     Family and Friend (FF) are highly influential to your decision, because you know them in  person and see what really happen to them when they invest. For example, today, your friend told you that she has invested in stock A and earned a lot of profit. The next day, your uncle called you and said that he invested in stock A and earned enough profit to travel to Europe twice!!. In this kind of situation, we are inclined to follow both of them and invest in stock A. what you did not know is that stock A might be going up for a while already. So, stock A might be considered expensive now. Therefore, after you bought stock A, stock A might not increase sharply as you expected.
     One thing that I want to warn you is that , once people start talking about a particular stock (such as stock A in this case). You should be careful that it might be a "overvalued stock". I mean they(FF) told you to buy stock A because they earned profit from it. When more and more people flock to stock A, stock A will be soaring insanely,(people bought stock A with insensible reason, only someone told them to buy!). Then, some groups of investor start to notice that the price of stock A is ridiculously expensive. So, they start to sell it. Consequently, the price of the stock A start to go down. Suddenly, everyone backs away from stock A at the same time, and shoots the stock price to the ground. ( Another tragedy!)........
     My caution here is be careful when people talking widely about some stocks. Stop and consider before you follow the crowd! Don't be deceived!

     Therefore, believing family and friend is not also an option for you.....The person you should believe the most is........"Yourself"

Next article I will tell you how!