November 24, 1998
Giving Thanks and Just Plain Giving
Thanksgiving Turkeys for Your Consumption
Not every turkey goes well with candied yams and pumpkin pie. Check out these investments gone bad courtesy of readers of our syndicated newspaper column...
Turkey # 1: Back in 1994, I got the bright idea of buying options on Dell. Earnings were about to be released and I thought that it was money in the bank. I planned to ride the wave up and sell my options for a nice profit. Well, things didn't work out that way. What was supposed to be a short one-week investment turned into a stomach-turning, painful two and a half months. Dell didn't do what I expected it to do before the options expired and I ended up throwing away $7000. If I had just bought Dell's stock instead, I'd be sitting on a twenty-fold return now, three years later. - Donald Wilson, Los Angeles, CA
The Fool Responds: Options require you to not only be right about the direction a stock will move, but also about when it will move. With companies you really believe in, buy stock, not options.
Turkey # 2: My wife's granduncle once gave her shares of TexasAmerican Bancshares, his employer. At one time they were worth $18,000. Then came the time when all the banks had their problems. We watched the stock evaporate to zero because she had warm feelings for her uncle and didn't want to sell. The only bright side was that we didn't shell out any money originally. - Warren Pettit, Hendersonville, TN
The Fool Responds: Many people make the mistake of letting their emotions interfere with investing. When a stock has performed well for you, it's easy to grow attached to it and be reluctant to sell. However, you should always try and remain objective, focusing on its performance and potential, relative to its competitors and peers. You can love your granduncle, but you shouldn't love the stock he gave you.
Turkey # 3: I couldn't wait to buy Tracer Petroleum Corporation after it was touted on television. Stubbornly, I've averaged down to a moderately large position in this turkey. I learned to always wait at least three days before buying a stock I hear about to give myself time to research and think. - Ross Kilpatrick, Sweetwater, TN
The Fool Responds: Don't sweat it, Ross. Everyone has to re-learn that lesson a few times. The main lesson we take from it is that research is far more important than timing. But an additional lesson that we glean from your note is that it is not a good idea to "average down" -- buying more shares as a stock's price falls. When our stocks fall, we always wonder if there mightn't be some information we've overlooked. Putting good money after bad is only slightly better than putting bad money after good!
Turkey # 4: Many years ago, I invested in what a friend promised was a "really hot stock." I bought 500 shares at 84 cents per share, knowing nothing about the business. I figured, heck, I had some "play money" -- back when I thought "play money" was a good concept. The stock slowly rose to about $1.00. Then it furiously dropped to 10 cents. My $500 in "play money" is worth $40. Later this year, I'll be wallpapering my office with the certificates! - Don Durance, Sarnia, Ontario, Canada.
The Fool Responds: Don, thanks for the confession. We don't like penny stocks, but the greatest mistake here was buying a company about which you knew nothing. Fortunately, you only lost $450. Unfortunately, with compounded growth, that $450 could've been worth a lot more to you. We're sure you'll set it right the next time 'round. Fool on!
Turkey # 5: Two years ago I bought 200 shares of America Online at $62 per share. It started going up and then began dropping. My "expert" adviser said to sell. My wife said to sell. Everyone said to sell. I didn't want to and fought it. The stock bounded back and finally, I gave in and sold at about $70. Shortly thereafter, the stock split two for one. Then it grew and split again -- and again. I could have had a profit of about $80,000, but I only made $1,700. Don't always listen to the "experts." (My Expert has since left the brokerage business and coaches track at a high school in the Midwest.) - Al Rosenthal, Rockville, MD
The Fool Responds: You learned an important lesson, Al. (We suspect your former adviser is having more success coaching sprints than marathons.)
Turkey # 6: How can anyone in his right mind invest in a company that has vacuum cleaners as its sole asset? Well, that's what I did. I bought shares of ZZZZ Best, a commercial and residential cleaning business, when I heard that it had signed a national contract with Sears to be their in-house cleaning service. Turns out this wasn't the case. The company is out of business now, and the only thing that really got cleaned was my bank account. - Steven Goldstein, Glen Rock, NJ
The Fool Responds: Ouch! You weren't the only one to get taken; Wall Street engaged in a feeding frenzy on ZZZZ Best, which was undone by massive fraud. The best protection against fiscal fiascoes like this is to have a diversified portfolio. Hold 8-12 stocks, both large and small, and do extra homework on the small ones, buying companies you know. If one implodes, the others will carry you.
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