This is a guest post from Analyst friend AVC
“Can you give me some tips?”, if you are working in stock market chances are you have encountered this statement more often other than “market su lage chee” or “market kya lagta hai” or “what do you think of market”. Also irrespective of your job profile whether you are receptionist or back office or IT guy working for a broking firm, you would always find this question creep in any conversation.
Imagine, you are at friends party
You: Hi Kunal, whats up pal?
Kunal: Hi Raj, welcome to the party buddy
You: Thanks, whts up
Kunal: meet my friend “Dr Rushabh from Nanavati Hospital”
You: o..doctor….great…..hey doc, I have been having continuous pain in my back, what do you think? O…also one more thing my 80yr old granny’s knee pains too…..much, do you think its arthritis?
Dr Rushabh: ummm…….actually……….I am a dentist.
You: oh ok……….but you still might have some idea about back pain, since you are doctor?
I don’t know if this habit of asking for free advice is very typical to Indian or its global phenomena (I have not ventured out of India, nor have I interacted with many foreigners to take a call). Most of the time it reminds me of Tata sky ad, “punche ne mein kya jaata hai?” (If you don’t ask, you will never know or ask no matter what). Key thing being, most of them want to make free money without any “mehnet” (hardwork) or paying for “other people’s mehnet”.
However it would be unfair to blame general people at large for such behavior, for simple reason the way stock brokers do business. A typical stock broker provides free stock tips, as he knows clients would trade with him and he would get paid by charging brokerage on the trade. Simple thing driving his business on this model is ingenious human nature, everybody is afraid to pass up the money making opportunity (without verifying if there actually an opportunity or not) which is best summed up by Charles P. Kindleberger
“There is nothing so disturbing to one’s well-being and judgement as to see a friend get rich”.
Due to this human nature, most people are compelled to ask for stock tip and many a time free stock tip. As my mother said to me during my childhood,
“don’t take/buy anything just because it is free or has something free with it, chances are you have already paid for it or will pay for it for long time in future”
This is something similar to economist say in general “There is no thing as free lunch”. Most of the people expect free tips to help them earn money, while in reality it’s rarely the case. Most (not all) lose money on this free tips, as broker knows your greed has taken over your brain. Broker’s model is very simple, he would give you 2-3 stock tips every day for 5 days meaning approximately 10-15 stock tips in a week. Chances of price increasing of any 1-3 stock is pretty high (simple case of probability), so even thought of 10 tips, 8 would go down broker would harp on 1-2 stock that went up and so would you brain. Hence you would remember that 1-2 stock that went up and you didn’t purchase (case of selective memory).
Let’s reverse this situation, if you had an idea that could make money would you tell me? Most people I know would say “why the hell would I do it?” and I completely agree with them. So extending this logic if broker has stock idea that can make money why does he share it with you? Why doesn’t he himself trade and make money and become rich? {Assuming making money is the ultimate goal and not samaj seva (charity)}. At this point, most MBAs come up with barge of answers to justify their argument that why both cases are different (although outcome in both cases is you can make money), I will leave that thought you to ponder on and simple advise that I have learned after following stock market for over decade “ don’t trust free advise”. If you make loss in stock market, your broker would not recoup it for you.