How Not to Buy a Car [Fribble] April 13, 2000

Fribble How Not to Buy a Car

By Paul K. Krueger
April 13, 2000

My son is away at school and wants to earn money for a car. His plan (Plan A) is to work to earn $1000 and then day trade until he has $10,000.

"There are kids at school who do this all the time," he says firmly. I suggest we move to Plan B.

I explain that, the miracle of compounding aside, it is difficult to double an investment. What he wants to do is grow his investment ten times -- in the space of three months. Perhaps he should adopt a more realistic goal.

"There are kids at school who do this all the time," he insists. I suggest we move to Plan C.

I will create a paper account for him and start him out with $1000. If he loses money, it's only on paper, but if he makes money I will put real dollars into an account for a car. He will e-mail me when he wants to buy and sell, and I will make a hypothetical trade based on the date stamp on his e-mail.

A few days later he e-mails me with the newest hot tip on campus -- BUY $500 OF ABSOLUTE FUTURE!!! I buy a hundred shares at $4.50. Earlier in the day the stock was over $6.

Of course, he had no idea what this company did or anything else about it. One look at the price chart and you can see the pattern of a stock that is being hyped by a penny stock advisory service. Today, two weeks later, the stock is about $1.

"There are kids at school who must be exaggerating," he says Foolishly. We both learned something on this one.