I noticed that a fellow family member (let's call her Alice) has an unusual stock selection method. This is the research process:
- Form an opinion of specific industries,
- Read news articles online (mostly on Yahoo Finance) that mention or feature some companies in those industries,
- Select a few of the "promising companies" that were mentioned in articles (usually large-cap blue-chips),
- Look up their "profit" on Yahoo Finance (this typically takes less than a minute),
- After a few days, decide to buy one or two of the selected stocks.
I initially had some objections to this "research process" when I first heard of it a few years ago. Buying large-cap stocks made the method seem safer, but I also thought that the process relied too much on personal feelings. I wanted to respect Alice's freedom to decide on her own investments, so I left my objections aside.
Recently however, Alice became excited about biotech stocks that were featured in some news articles. Some of these are biotech penny stocks. This made me worried, because I associate biotech penny stocks with high volatility and high risk of loss. I want to know if my concerns are justified. Can the news-based research process I outlined above be considered intelligent, or is it just ignorant speculation? What are the risks of buying stocks featured in news articles?