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Don't buy E*Trade on the rumors

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One of my favorite Jim Cramer-isms is "Commandment No. 5" -- Tips are for waiters. Here's what he writes:

You know that the best moves are takeovers and you are convinced that if you can catch one, it will make up for all the bum steers and bad bets you have made. Tips are winning lottery tickets in most people's eyes.

That's the reason I've had to default to a simple analogy, tips are for waiters, to remind myself how stupid tips really are. Does it occur to you, on hearing the tip, that if the person telling you that Nokia is going to buy RIM really knows that's going to happen, the person is an insider and is breaking the law, and you could get in trouble, too? Does it occur to you that if the person isn't an insider, he doesn't know? There simply is no way a tip like that can work. Leave it for the waiter.

That's what investors should be keeping in mind as they watch shares of E*Trade (NASDAQ: ETFC) surge on extraordinarily vague takeover rumors. Shares were up as much as 25% on rumors that Schwab and Ameritrade were interested in buying the beleaguered broker. Where did these rumors come from? Ah, yes. "A source." And who's to say that "the source" isn't some clown holding a ton of E*Trade shares that he needs to get rid of -- for 25% more than they were trading before the rumor?

Everyone knows E*Trade could be in play -- any time a stock tanks that much, there are always going to rumors. But no one really knows what's going on, and buying E*Trade on the rumor is just mindless speculation.

As Doug McIntyre wrote, "E*Trade may be worth over $5, but it could also be worth a lot less."

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Symbol Lookup
IndexesChangePrice
DJIA-45.878,137.30
NASDAQ+2.341,754.89
S&P 500-3.43879.25

Last updated: July 10, 2009: 02:01 PM

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