In 2014, my aunt got what seemed like a golden stock tip from a friend in finance: a rumor that a small Philippine Stock Exchange company would be bought out by a bigger firm, for way more than its current market price.
The urgency? Real.
"This thing's gonna skyrocket, for sure! Look at that chart! The insiders are already buying in!" her friend said. My aunt took a peek, and, lo and behold, the friend was right. The stock price was on a tear, jumping from a measly ₱0.04 per share to a whopping ₱0.2—a 500 percent jump—in just three months!
She hesitated at first, but the stock kept climbing. Just two months after that initial jump to ₱0.2, it shot up to ₱0.6 per share—another 300 percent increase! Still, ₱0.6 was less than the rumored buyout price. Afraid of missing out on even more gains, my aunt dove in and loaded up on the stock.
At first, it looked like she was right, too. A month went by, and the price kept going up, hitting ₱0.8 per share. Then, another month, and the cracks started showing. The price dipped from ₱0.8 to ₱0.7. Hope still hung in the air. Maybe the insiders were done buying, and the merger was about to be announced.
So, she waited. Over the next few months, the price kept falling, crashing from ₱0.7 all the way down to around ₱0.2 per share. She kept hoping for that merger announcement, but no matter how long she waited, it never happened. So, in 2015, almost a year after her first purchase, she decided enough was enough. She sold her shares, taking a loss of over 50 percent.
Financial rumors are everywhere, and if you read business news, you've probably heard your share of these stock tips. The problem? Rumors are unreliable and easily manipulated.
Think about the classic "pump and dump" scheme. A group buys a bunch of a low-liquidity asset, like a penny stock. Then, they spread fake news—like merger rumors—to artificially inflate the price. Once it's high enough, they dump all their shares for a huge profit, crashing the price and leaving the latecomers stuck with losses.
When investing, never assume people are just being nice. There's little reason for someone with a truly great stock tip to share it. Think about it: If you had the stock idea of a lifetime, would you tell random people, causing the price to jump early? Or would you keep it to yourself to buy as many shares as possible at low prices? For most people, sharing great tips makes zero financial sense. So, ask yourself: Why would anyone share a truly profitable tip with me? Are they really so generous they'd cut their own profits so I could benefit? Or do they have another reason for telling me?
When investing, a healthy dose of skepticism and thorough research are key. Instead of chasing rumors, research companies, understand their business, and look at their financials. Don't rely on others for "get rich quick" tips. Quick riches sound tempting, but if it sounds too good to be true, it probably is. Be careful and skeptical with your investments, and you'll end up with a safer, more secure portfolio.
******
Keith Lim is a personal finance writer and stock market investor. His insights can be found at keithblim.com.