Blog · · 4 min read
Why you shouldn't buy a stock on a tip
A friend, a YouTuber or a stranger on Reddit names a stock. It sounds convincing, so you buy it. At that moment the tip has done everything it can. The hard part hasn’t started.
A tip tells you what to buy. It doesn’t tell you what to do when the stock falls. It doesn’t tell you when to sell after it rises. And nobody calls you on the day your reason for owning it stops being true. Those are the decisions where money is made or lost.
Two falls that looked the same
Meta and Snap make their money the same way, from ads on social apps. Both hit their highs in September 2021, less than three weeks apart. Then both collapsed.
Sep 2021Oct 2026
By November 2022, Meta was down 77% and Snap 89%. Anyone holding either one on a tip faced the same question and the same blank page: buy more, or get out? The chart looked the same either way.
The difference was in the annual reports, open to anyone.
| Meta | Snap | |
|---|---|---|
| Net profit | +$23.2bn | −$1.4bn |
| Free cash flow | +$19.3bn | +$0.06bn |
One company was earning billions through the slump. The other lost $1.4bn that year. You can only see that if you know what you own.
Without knowing what you own, every move is a guess
When it falls. Some of the best investments ever made fell further than most people could sit through. Apple lost 82% in the 1990s. McDonald’s lost 74% between 1999 and 2003. Booking lost 99% after the dot-com bust. All three went far past those old highs. A fall can be the best chance to buy you will ever get. It can also be the first step to zero, and only what you know about the business tells you which.
When it rises. You are up 50%. Take the profit? Hold on? If you don’t know what the company is worth or what is driving it, the only number left is the price you paid. That is how most people decide. In a study of 10,000 brokerage accounts, investors were one and a half times as likely to sell a winning stock as a losing one. The winners they sold then beat the losers they kept by 3.4 percentage points over the following year.
When the story changes. Growth slows, debt piles up, the founder leaves. The person who gave you the tip has moved on to the next one. Nobody is watching it for you.
The odds are not on your side
The stock market as a whole has rewarded patience. A single stock picked because someone said so is a very different bet.
- 4%of US-listed companies produced the entire net gain of the US stock market over Treasury bills from 1926 to 2016. 58% of stocks did worse than Treasury bills over their lifetime.
- 40%of companies in the Russell 3000 since 1980 have suffered a permanent fall of 70% or more from their peak.
- 56%of finfluencers in one large study had negative skill: their advice lost 2.3% a month against the market. They also had more followers than the skilled ones.
That isn’t investing. It’s gambling.
If you can’t say what you own, why you own it and what would change your mind, a win tells you nothing and a loss teaches you nothing. You can’t repeat a result you can’t explain. Over the years that leaves luck, and buying on a bare recommendation is a gamble with your own money.
I know. Years ago I bought a stock on a tip because it looked cheap. It fell 90%, and I couldn’t have told you why.
A tip is where the work starts
There is nothing wrong with hearing about a company from someone else. Just treat it as a question, not an answer. Before you buy, you should be able to finish three sentences.
Before you buy
This company makes its money from what, exactly.
It is hard to beat because your reason.
I change my mind if one thing you can check.
If you can’t finish them and don’t want to do the work, a broad, low-cost ETF lets you own the market without an opinion on any single company. That is a perfectly good answer. What doesn’t work is the thing in between: one stock, picked by someone else, understood by no one.
Doing it properly means more than a thousand pages per company, then keeping up with every new report. That is what MoatDiver is for. It reads all of it, lays out why a company is worth owning and where that stops being true, and checks those lines every day for the companies you follow. The decision stays yours.
Know it before you own it.