Good stock tips are everywhere! Aren’t they? There is no shortage of opinions on which stock will be the next winner. Cable news, news publications, and social media are full of opinions on the next best investment. With so many people giving their view on a good stock tip, how can anyone cut through the noise? I have an answer that might surprise you.
This past week was a perfect example of the mania behind finding a good stock tip. The Wall Street Journal reported that chip makers Xilinx and AMD were in initial talks about a merger. The writers predicted that $26 billion Xilinx might go for about $30 billion.1
Shortly after the Journal report is release, Squawk On The Street’s stock picker, Jim Cramer, throws cold water on the news. He thinks the merger will never happen. 2
A merger stock tip
So, is the news of the merger a good stock tip? It didn’t take long for the investment research firm, Morningstar, to add their estimation to the merger value. Since they are a numbers-driven company, Morningstar put an educated view on the potential merger. Morningstar looked at the earnings, competition, and stability of the two companies. They theorized that the deal could go as high as $34 billion!
The Journal and Morningstar’s views are prevailing over the Squawk on the Street commentary. The Trading volume and stock price of Xilinx spiked as soon as the market opened. On October 9th, Xilinx’s price went from $106.18 per share to $120.90 per share. That is a 13.86% jump in price in one day.
Table 1- Folio Institutional3
Here is a critical point. Look at the change in share price in relation to the value of the merger deal reported by the Wall Street Journal. The Journal said that they estimated that Xilinx was valued at $26 billion and would sell for $30 billion to AMD.
Little numbers, a significant change
If you translate that 13.86% increase in share price to the overall company value, these are the results. $26,000,000,000 + 13.86% = $29,603,600,000. Here is the astounding part. That increase happened between the stock market’s opening bell at 9:00 am, and 9:30 am. Within 30 minutes, Xilinx increase almost $4 billion! What were you doing between 9:00 am, and 9:30 am on Friday, October 9th?
It’s probably safe to say that you were not buying Xilinx. That may sound sarcastic, but it’s meant to drive home a point. What is a good stock tip? A good stock tip is to buy before the price goes up. I know you’re probably saying, “really, Captain Obvious!” But surprisingly, many people buy stocks based on news they read in a financial publication, heard on a talk show, or hear on the news. By the time you read or hear the news, it is too late.
How a good stock tip works
Here is the anatomy of a good stock tip. First, make buying stocks part of your regular saving strategy and diversify. Don’t make the mistake of putting most of your cash in one or two stocks. Some advisors say pick stocks around a theme. While that may work for some people, I am more risk-averse and methodical. Diversifying among sectors, geography, and valuations spread the risk more logically. You can choose some industries over others, but consider which sectors are in and out of favor. For more on this strategy, refer to a video that I did at the beginning of the COVID-19 pandemic called “How to Invest During a Recession.” In this video, I discuss several issues, including five investing trends that were pertinent then and now.
What’s your risk tolerance?
A continuation of this strategy is to decide the level of risk you want to take, create an allocation of stocks you like, and schedule your purchases. My last blog, “How to Invest a Million Dollars in the Stock Market,” goes further into this strategy.
Another approach is to create a list of stocks you like. Then set aside a portion of cash that you either want to venture with or use for the long term. Then wait. At some point, the market will fall. When it does, buy the stocks you have on your list. There is no guarantee of this strategy. Always remember, there is a chance to lose value. Look to the words of legendary money manager, Peter Lynch. He said, “People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”4
Use the market cycle
In my opinion, any limited allocation stock investments for less than five years is a venture more than an investment. You improve your chances of making a profit if your time frame for investing is at least ten years. The logic is that most bear markets last between twelve and eighteen months. Most bull markets last between three and four years. A bear market and a bull market are one market cycle. Two market cycles would be about ten years. This is still not a guarantee, but your odds of making a profit are better the longer you are invested in a diversified portfolio.
Efficient Market Hypothesis
Even though businesses and some investing methodologies have changed over the years, some of the strategies have not changed for decades. That does not mean that those sage philosophies are useless or outdated. To the contrary, some of the investment theories of decades past are still useful because they work.
One such established principle that explains Xilinx’s unpredictable rapid rise is the efficient market hypothesis or the EMH. There are three parts to EMH, but I don’t want to bore you with investment theory. Here is the part that I think applies to the potential Xilinx merger. Those that strongly agree with the efficient market hypothesis believe that “current stock prices fully reflect all information, whether it is publicly available or not.”5 In other words, you cannot outguess the market. That explains the rapid rise of Xilinx. As soon as the news of the potential merger was public, the stock price jumped to the projected value of the deal. It may change in the coming days. Or if the deal falls through as Jim Cramer speculated, the price may drop again.
Earnings, competition, and stability
So, let’s ask that beginning question again. What is a good stock tip? A good stock tip identifies a company by analyzing their earnings, competition, and stability. A good stock tip uses those established parameters to find stocks that will fit into an overall investment strategy. If you need help using these strategies to design a plan that will help you avoid running out of money during retirement go to my scheduling page to set up a conversation with me. Currently, I am only scheduling for those that live in Texas. Schedule a Call to Learn More.
1 Lombardo, C., and D. Cimilluca. “AMD Is in Advanced Talks to Buy Xilinx.” Wall Street Journal, October 8, 2020. https://www.wsj.com/articles/amd-is-in-advanced-talks-to-buy-xilinx-11602205553?st=iop3z9vqohrrbgf.
2 CNBC Squawk On The Street. “Jim Cramer on why he thinks Xilinx may not be ready to sell to AMD.” CNBC. Video. October 9, 2020. https://www.cnbc.com/video/2020/10/09/jim-cramer-on-why-he-thinks-xilinx-may-not-be-ready-to-sell-to-amd.html.
3 Folio Institutional. Xilinx 5 Day Performance Chart. McLean, VA, 2020. Accessed October 9, 2020.
4 Lynch, Peter, and John Rothchild. One Up On Wall Street: How To Use What You Already Know To Make Money In The Market. New York: Simon & Schuster, 2000.
5 Woerheide, Walter J. Fundamentals of Investments for Financial Planning, 8th ed. King of Prussia, PA: The American College Press, 2016. PDF e-book.