Tips for evaluating (avoiding) stock investment

Psssst. Have I got a stock tip for you! Come closer. You know what it is? Research! What I’m trying to tell you is to never automatically invest just because you get a hot tip from someone. Good investment selection means looking at several sources before you decide on a stock. No shortcut exists. That said, getting opinions from others never hurts — just be sure to carefully analyze the information you get. In the following list, I present some important points to bear in mind as you evaluate tips and advice from others:

Consider the source. Frequently, people buy stock based on the views of some market strategist or market analyst. People may see an analyst being interviewed on a television financial show and take that person’s opinions and advice as valid and good. The danger here is that the analyst may be biased because of some relationship that isn’t disclosed on the show.

It happens on TV all too often. The show’s host interviews Analyst U.R. Kiddingme from the investment firm Foollum & Sellum. The analyst says, “Implosion Corp. is a good buy with solid, long-term, upside potential.” You later find out that the analyst’s employer gets investment banking fees from Implosion Corp. Do you really think that analyst would ever issue a negative report on a company that’s helping to pay the bills? It’s not likely.

Get multiple views. Don’t base your investment decisions on just one source unless you have the best reasons in the world for thinking that a particular, single source is outstanding and reliable. A better approach is to scour current issues of independent financial publications, such as Barron’s, Money Magazine, SmartMoney, and other publications (and Web sites) listed in Appendix A.

Gather data from the SEC. When you want to get more objective information about a company, why not take a look at the reports that companies must file with the Securities and Exchange Commission (SEC)? These reports are the same reports that the pundits and financial reporters read. Arguably, the most valuable report you can look at is the 10K. The 10K is a report that all publicly traded companies must file with the SEC. It provides valuable information on the company’s operations and financial data, and it’s likely to be less biased than the information a company includes in other corporate reports, such as an annual report.

To access 10K reports, go to the SEC’s Web site (www.sec.gov). From there, you can find the SEC’s extensive database of public filings called EDGAR (Electronic Data Gathering, Analysis, and Retrieval system). By searching EDGAR, you can find companies’ balance sheets, income statements, and other related information so that you can verify what others say and get a fuller picture of what a company is doing and what its financial condition is.