Cold calls can burn investors
Has this happened to you? You’re engrossed in your favorite TV show, only to receive a phone call from a broker you don’t know who urges you to invest in something. This is a “cold call.” A classic broker cold call might inform you that you’re among the “lucky few” to be offered a “surefire investment.” You might even be guaranteed “a 200 percent return within six months!”
Don’t become a cold-call victim, as many do. Understand that promises of high returns for low risk are likely to be broken. Scoff at warnings that you have to “act now!” Any good investment should still be around tomorrow. Avoid “inside” tips, because it’s illegal to pass on or act on material that is inside information. Steer clear of anyone unwilling to provide details in writing. Beware of predicted or “guaranteed” profits.
If a cold-calling broker really had a valuable stock to offer, he or she wouldn’t have to convince strangers to buy it. People would be snapping up shares on the open market. Stocks that cold callers try to sell are often ones that no one else wants, stocks that their firm wants to unload. This applies to initial public offerings (IPOs), too. Shares of IPOs that people are excited about tend to be hard to come by, not aggressively hawked over the phone to strangers.
You can ask any cold caller to put you on his firm’s “do not call” list. You can also prevent some others from being conned by turning in any hypesters. Take names and notes during the call and report anything shady to the Securities and Exchange Commission (SEC) at www.sec.gov/complaint.shtml. The SEC offers some excellent guidance on cold-caller restrictions at www.sec.gov/investor/pubs/coldcall.htm. (Shady behavior would include rudeness, aggressive sales techniques and ultimatums.)
Anyone thinking of investing with a cold caller should check out the regulatory background of the salesperson and/or brokerage firm. To do that, visit the FINRA Broker Check area at www.finra.org or call 800-289-9999.
If this is too much to remember, you have one more option: Just hang up.
ASK THE FOOL
Q: I often run across announcements that such-and-such company has “initiated coverage” on a particular stock. What does that mean? – R. Gibbs, Old Hickory, Tenn.
A: Full-service brokerages and investment banks typically employ analysts to follow and study various companies. The analysts issue recommendations that are passed on to broker clients and others. When a brokerage initiates coverage of a company, it just means that the company is now being followed by the firm and that the brokerage has an opinion on it (perhaps “Buy,” “Hold” or “Sell”). There may also be a detailed research report available on the stock, which is typically much more illuminating than a simple “Hold” rating.
Keep in mind that “Sell” ratings are relatively rare — arguably because since these recommendations usually come from organizations with investment banking operations, the analysts probably don’t want to burn any bridges with current or potential investment banking clients by being too negative.
Many brokerages offer gobs of research reports on companies. See what yours offers, or look for a better brokerage at www.broker.fool.com.
Q: If a novice had $40,000 to invest now, how would you advise him to invest and still sleep? — D. Murray, Los Angeles
A: First off, don’t put your money anywhere without confidence in what you’re doing. Perhaps park it in a CD for a few months, while you take some time to learn more about your options. Later, you might want to move some or all of your long-term money into a low-fee, broad-market index fund, such as one based on the S&P 500. If you’re willing to do some research after that, you might begin investing in carefully selected stocks and mutual funds. Learn more at www.fool.com/investing.htm.
MY DUMBEST INVESTMENT
I bought about 100 shares of Yahoo! when it debuted via its initial public offering (IPO) in 1996. I think it was around $30 back then. After a few months, I sold at roughly the same price because I needed some money to buy a house. Stupid me. Then again, stupid me in retrospect. Who knew? — R.B., Rising Sun, Md.
The Fool Responds: You’re right. There is no way to know which of your holdings will be the most stellar performer until you’re looking at them in a rearview mirror. That said, you can improve your odds by keeping up with your holdings regularly — evaluating how strong their financial health is, along with their growth prospects and competitive position. When you need money, sell the holding in which you have the least confidence. Yahoo! shares have risen more than 16-fold for its earliest investors who hung on — that’s enough to have turned $5,000 into more than $80,000. Think about your home, though — its value has probably increased considerably, too, boosting your net worth.