Should you act on a friend’s stock tip?

Every so often, on a group text chat I have with a couple of friends, one friend will throw out a stock tip to the other. That leads to the question: what should people do when a friend says they bought a stock they think is going to go way up?

My friends are typical do-ityourself investors — they hear about an interesting company, they understand the business opportunity and they buy in.

It’s not a bad way to approach investing, says Scott Willis, head of research at Grizzle, a New York-based investment research company that studies cannabis companies, among other things. When you hear a stock idea around the water cooler, the first thing the tip recipient should do is see if the idea makes sense. Reading articles is a good place to start. “Go to Google and find out information about the company,” he says.

You’ll want to dig a little deeper by reviewing a company’s investor presentation, says Willis. They usually include forecasts on where the company is headed, the kind of growth it expects, information on its market and more. Look at analyst reports, too. If you can, peruse the company’s financials. Find its revenue and see how quickly it’s growing. Also, check if the business is profitable by looking at net income and cash flow growth.

While finding these details may seem overwhelming, a simple document search for “description of business” or “revenues,” should get what you’re looking for. “It’s always worth it to go deeper and look at the numbers.”

No matter what company you buy, DIY investing is risky, so the more you know about an operation’s growth prospects the better. The pot industry is clearly an up and coming sector, but it’s still early. Buying a basket of the top eight performing stocks might be a better way to go than picking just one, says Willis.

Stock suggestions don’t always come from friends in chat groups. Many of us pal around with people who work at public companies. So, what if your friend tells you that business is going great? Should you buy into their company’s stock? It can be tricky, says Willis, as you don’t want to be trading on insider information.

A good rule of thumb is to avoid acting on any forwardlooking statements. If the friend says the quarter has been great or some big deal is about to happen, don’t buy in.

If they say, “business is going great, I love working here, and I own the stock,” then that’s good advice.

“If they own the stock then that’s probably worth more than water cooler gossip from a friend,” says Willis. “That means something because they’re seeing it from the inside.”