THE INVESTMENT-NEWSLETTER

business thrives on a never-ending supply of stock tips, which subscribers expect to regularly receive no matter what the market environment might be. And even though in the market, sometimes the best move is no move at all, nobody wants to pay $39 a month for a newsletter whose advice is to sit tight and wait for a higher probability trade. That just doesn't fly for the "Booyah" crowd.

Indeed, stock tips are the lifeblood of the investment world. From newsletters to newspaper articles, they are the essential call to action, the fuel that makes the market engine go. Stock-tip culture stokes the misperception that the best investors are the most active investors, frantically bouncing from one trade to the next, grabbing a point or two of profit on XYZ before moving. To that end, many "active" investors end up becoming like rabid versions of Pavlov's dogs, always haphazardly running from one investment idea to the next without any continuous strategy or approach.

You don't require a dozen new stock tips each month. As we've often pointed out, one only needs a few successful ideas each year in order to put together a market-beating performance. Quality rules over quantity in this game, and there should always be a large number of trades you don't take compared with the small minority of those you do.

For example, amid a generally wobbly equities market lately, I've been impressed with the strength in many consumer food-related stocks like General Mills, Kellogg, Tootsie Roll Industries and Kraft Foods. But given my exiting commitments, primarily in volatility derivatives and variable debt securities, adding exposure to the food group just doesn't fit my risk budget now. The stocks might be ripe for someone in the abstract, but not for my particular portfolio at the current moment.

Tips are always focused on new money, not existing positions or open trades, which in most cases are significantly more important to your bottom line. So in the rush to chase down the next hot idea, too often investors end up bailing out on the profitable trades already in their account.

When choosing between an existing winning trade and making a new investment, I'd always choose to preserve the existing trade, which, all things being equal, is a statistically higher-probability opportunity than putting new money to work. The market doesn't "know," for example, that you bought PXRE Group 10% lower. Everybody in the world would love to be in the position of having an open, winning, reasonably sized trade. Yet, when offered the option of a brand new ticker, most investors are perfectly happy to trade away their biggest asset for the uncertainty of what's behind "Door #2". A hint of advice: Don't make that deal.

Choosing an investment is subjective. We can't be on everything and, as we often point out, must always focus on our short list of best-quality trades. But once a position has been taken, the question of how to manage the trade should become highly objective. It's the price action of the security itself that should determine when to sell it, not the availably of another potentially smart idea. Let the market decide when to bail on XYZ, not the top list of hot new stocks in some glossy finance magazine.

This is exactly how the market ends up chewing us up. A barrage of seductive stock tips comes along, and we get so excited about the prospect of the next new thing and barely give our existing commitments the opportunity to pan out. The market might hang us, but through such an impulsive approach, we end up tying the rope ourselves.

I do subscribe to the notion that there is always a bull market somewhere. But I also know that there are innumerable ways to make money in the markets, and even though XYZ might be a promising trade, I'm not always in a position to take advantage of it. And even though we might be looking for action, the best course of action is sometimes no action at all. How many newsletter writers are going to sell you that one for $399 a year?

Plus, because they always hold the promise of being the "next Microsoft" (and not Vonage Holdings), we tend to overplay a stock tip's potential upside gain while minimizing its downside risk. You can't "let the winners run" if you're always dumping them to pursue the next newsletter tout.

Stock tips are the market's kindling, essential for combustion but useful only in a restricted fashion. Tips should inform our investment decisions, but not dictate them. Like a bus, if you miss a stock tip another tends to be following not far behind. And while a particular idea might hold promise, it's almost always better to preserve an existing winning trade rather than swap it for an untested new bet.

Jonathan Hoenig is managing member at

Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in many of the securities mentioned.