Friday, February 15, 2008

Hot Stock Tip

I don’t normally go for hot tips on stocks, but I can’t help myself because I’ve come across a scorcher! Before I reveal the name of the stock, let me just say that this tip is a little different from most tips because it comes with a strategy that you have to follow to make money on this stock.

The company is Questcor Pharmaceutical Corporation, trading under the symbol QSC in the US. This stock has been red hot. On Aug. 18th last year, QSC closed at 35 cents per share. Now it trades at about $4.70, a 1243% increase!

With just three of these opportunities in a row, you could turn $1000 into over $2 million. The catch is that all this stock appreciation for QSC is in the past. So, to make money, you’ll have to travel back in time to Aug. 18th to buy this stock and then sell it now.

The reason for the time travel is that I have no idea what Questcor Corporation does or what will happen to its stock price in the future. I’m not buying even a single share because I haven’t perfected my time machine yet.

I think I’ve milked this long enough. Obviously, I have no real stock tip. What difference does it make if a stock has done well in the past if you have no insight into its future? The same is true of mutual funds, but for some reason many people jump back and forth between mutual funds based on their past results.

There are a staggering number of online services available to help you sift through mutual funds to find the ones that performed well in the past. They seem to admit the futility of this approach with the disclaimer “past results are no guarantee of future returns.”

When an advertisement trumpets ABC fund’s category leading one-year returns, the correct response is “So what? What reason is there to believe that this fund will perform well again next year?” There might actually be a good reason to expect good future returns, but don’t bet on it.

Here are some posts that explain why you might be concerned that ABC fund could perform poorly after you buy into it:

A Mutual Fund Too Successful to Succeed?
The Illusion of Mutual Fund Returns

Index Funds Beat Most Mutual Funds

Always be sceptical when it comes to hot stock tips and top performing mutual funds.

2 comments:

  1. You could also make a lot of money publishing previous winning lottery numbers in the "pick your numbers" lotteries with either the strategy:

    1) These numbers will never come up again because they have already come up once.
    2) These numbers are HOT and should be used because they have already won

    Come to think of it, those books already exist.

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  2. Big Cajun Man:

    Do any of these lottery books contain both of these contradictory strategies? If I wrote a nonsense book like this, I couldn't resist contradicting myself all over the place:

    "The important thing is to stick with your plan to use ages and birth dates as lottery numbers. Just go through your various family members to find ages that are the same as numbers that have come up lately, because those numbers are hot! When you're looking at birthdates, go for the ones that haven't come up much as lottery numbers, because those numbers are due to come up."

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