Tips Are for Waiters, Not Traders

Investors should never take or listen to stock tips, Cramer said. They shouldn’t try to get stock tips. Tip generously when out to dinner, but that’s the only kind of tip that’s allowed in the People’s Republic of Cramerica.

What’s so bad about tips? When investors hear a rumor, say, that Nokia is going to buy Research in Motion, the tip may be true, but it's more likely that investors will want it to be true. They know that takeovers are the best moves, and they want the big score.

But Cramer says that bells should immediately start going off in an investor's head. They should ask themselves some key questions, such as, “How did this person get such great information?” The tipster would have to be an insider to know a deal of that magnitude was going down. If that’s the case, he’s breaking the law by sharing that information. And if an investor trades on that info, he could get into a lot of trouble.

If the tipster is not an insider, then there’s just no way he could know that Nokia’s trying to take over RIMM. People who aren’t insiders just don’t have access to that information. Who would want a tip from somebody who doesn’t know anything?

Here’s the worst part: When someone is passing out stock tips even though he doesn’t truly know anything, that person has an agenda. Rumors don’t get started for no reason. If you get a tip, it’s probably because somebody’s in a bad position. So if there's a rumor that Nokia’staking over Research in Motion, most likely that person has a load of RIMM stock he’s hoping to sell into strength.

We all would love to get a real tip, but those don’t exist. As far as Cramer’s concerned, a tip is either illegal, incorrect or straight-up manipulative. None of those things is good for an investor.


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