Getting Stock Tips From Your Group Chat? Here’s How to Know Which Ones are Worth Exploring

It feels like everyone these days is in some sort of group chat with their close friends, talking about sports, movies, politics and books. You’re no doubt sharing hilarious memes, too, and if you’re a more business-minded group, you might be sharing something else: hot stock tips.

While stock-picking ideas can come from anywhere – the news, social media, your Uber driver – what you hear from your close friends might hold sway more than anything else. After all, these are people you know and trust; when one of your smart, well-informed pals shares a tip in the chat, you might feel inclined to act on it, even if you’re not a big stock-picker yourself.

Part of the reason for the impulse is the desire to belong, says Dave Valliere, director of the Entrepreneurship Research Institute at Toronto Metropolitan University. “We feel that kind of social pressure because we’re social animals,” he explains. “People want to belong, and you belong by holding, or at least appearing to hold, the same values and opinions as other members of the group.”

That desire might be so powerful that you talk yourself into feeling bullish about the stock your friend recommended. “You may act upon it as if it’s a good idea, because you’re reinforcing the group’s norms and expectations,” says Valliere.

Watch out for cognitive biases
Wanting to belong isn’t the only driving force in this scenario. As investors – and as human beings – we’re also influenced by our cognitive biases, deeply ingrained tendencies or patterns of thinking that can affect our judgment and decision-making, often without us realizing it.

These are just some of the cognitive biases that may get triggered by that group chat, and that could potentially lead you to make less than rational investment decisions:

● Bandwagon effect: Conforming to others’ attitudes, beliefs and behaviours out of a fear of missing out (FOMO).¹ Stock market bubbles are a good example: investors ‘jump onto the bandwagon’ of a trendy, overvalued or speculative stock or sector, inflating prices and causing a bubble. When that bubble eventually bursts, many could suffer steep losses. History is littered with burst bubbles, from the Dutch tulip bubble in the 1630s, to the dot-com bubble in the late 1990s, to the more recent Canadian cannabis bubble in 2018-2019.

● Confirmation bias: Finding and prioritizing information that agrees with your existing beliefs² – for example, only looking for positive stories about a stock recommended by a friend. Closely related: the cognitive process of motivated reasoning, where you hope that something will be true (like a certain company being a good investment), and you conduct your research and interpret information through that lens.

● False consensus effect: Overestimating how many other people share your values, beliefs and behaviours.³ This might convince you that your views are widely held.

● Regret avoidance: Not wanting to feel regret about an earlier decision⁴ – especially if you made it against the consensus of your group – you might hold a losing or unsuitable investment for too long.

● Anchoring bias: Over-valuing the first piece of information you receive about something.⁵ You might favour your friend’s stock recommendation too heavily, even if your own research paints a less-than-rosy picture.

These and other cognitive biases, coupled with our desire to belong, can make us more receptive to ideas shared in a group. If you’re aware of these tendencies, though, it may be easier to view things with healthy skepticism.

Invest based on fundamentals, not FOMO
So, how can you decide whether the idea from your chat is a good one to pursue? When a friend suggests buying a certain stock – or crypto, or real estate, or any opportunity, really – look into the idea, but make sure to think critically about it, too.

“Don’t try to prove the things you believe when you’re doing your research,” says Valliere. Instead, he says, it can be a helpful to try and disprove the thesis, especially for those feeling social pressure to buy in. Consider buying the stock after you fail that task.

“If everybody is saying, ‘you ought to be buying into AI stocks,’ don’t go around researching how good AI stocks are and all the great predictions about them because it’s just going to reinforce your belief,” he says. “You’re highly motivated to come to the conclusion that AI stocks are a good buy, because then you can agree with your tribe.”

One way to determine whether something is worth investing in could be to look at a company’s fundamentals. What exactly you’ll want to look for will depend on the company and sector, but consider looking at the company’s annual reports and disclosure documents. See if the business is growing its revenues and earnings. Does it pay a dividend? And if so, what does its dividend payout ratio look like?

In other words, you may want to make sure that the investment is sound and that you can have a reasonable expectation that its stock price will grow over time. Building your own thesis around what your buddy is saying is often a better to invest than simply following the crowd.

Before you shell out your hard-earned money, you might want to ask yourself these questions: (1) do you already have exposure to the stock, or stocks within the same sector, through a mutual fund or an ETF in your portfolio?; and (2) does the stock fit with your risk appetite, time horizon and investing plan? Remember: Only you – not the group chat – can determine whether a stock is right for your portfolio.

Sources
^1. _{Verywell Mind, “Bandwagon Effect as a Cognitive Bias”, September 2023}
^2. _{Forbes, “Confirmation Bias: What It Is And How To Overcome It,” July 2024}
^3. _{Psychology Today, “How the False Consensus Effect Warps Our Online Reality”, August 2024}
^4. _{Investopedia, “Regret Avoidance: Meaning, Prevention, Market Crashes”, September 2022}
^5. _{APA Dictionary of Psychology, “Anchoring bias”, April 2018}