New Ways to Lose Money Every Day

Wall Street made billions in the 1990s by helping profitless technology and dot-com companies go public. Remember Pets.com? How about Webvan? One of the most egregious -- if not the most -- was Linux.

Check out this statement from the "Internet infrastructure" company's 1999 IPO prospectus:

We do not expect to generate sufficient revenues to achieve profitability and, therefore, we expect to continue to incur net losses for at least the foreseeable future. If we do achieve profitability, we may not be able to sustain it.

Classic, right?
Well, that very big, very bright red flag wasn't enough to stop investors from driving shares of the company up an incredible 700% on their first day of trading, awarding Linux with an incomprehensible market cap of more than $9 billion.

Again: $9 billion. That's about the market value of hotelier Marriott International, but remember -- Linux didn't expect to generate any meaningful profits in the foreseeable future!

When the dot-com crash came, the Street had made a mint selling Silicon Valley's hype. From 2000 to 2002, $5 trillion in paper wealth evaporated from the Nasdaq -- much of it was institutional money, to be sure, but many individual investors were left holding the bag, their savings down the drain.

You just have to love Wall Street
The great Nasdaq crash is hardly the lone example here. In fact, Wall Street invents new ways to lose money every day. Twenty years ago, the most popular game in town was faulty junk bonds. This was followed in the late '90s by Internet companies that peddled pipe dreams instead of profits. In recent years, Wall Street levered up on poorly rated securities backed by porous foundations of subprime mortgages.

Unfortunately, too many of us "small" (their parlance) investors try to play along. More often than not, we end up losing our shirts.

What was wrong with the old way of losing money?
You know about the subprime debacle. You know that Wall Street banks made billions for years by slicing and dicing pools of shaky mortgages into highly rated securities. You know what happened to Bear Stearns.

What you might not know is the magnitude of money that has been lost since the crisis began. Here's a running tally of the credit-crunch fallout, courtesy of the BBC:

That's more than $170 billion in losses so far from a sample of big industry players. Some studies suggest the losses from the credit crunch will get much worse. Low interest rates certainly played a role, but so did lax credit standards, faulty perceptions that housing prices always go up, and, as usual, downright greed.

Again, large groups of individual investors got caught up in the game, whether by taking on more house than they could afford or simply by trusting the balance sheets of financial companies they owned. And, as in the dot-com bust, many of them got pulverized, as that last column proves.

Wall Street's latest and greatest
As we've seen with the Internet and subprime busts, investment fads usually end with nasty losses for both institutions and individuals. So always be wary of the latest hot investment trend. Here are a few places the hot money seems to be funneling toward today:

• Alternative energy companies (high oil prices)
• Gold (safety, inflation/dollar hedge)
• Commodities (resource scarcity, emerging market demand)
• Agriculture (ethanol production, global food shortages)

Wall Street loves these hot trends right now. Need proof? Take oil, for example. Soaring prices for the black stuff have led to a surge in IPOs (here we go again!) of alternative energy companies like First Solar (NASDAQ:FSLR) and Suntech Power (NYSE:STP).

And oil isn't the only hot commodity Wall Street is making bank on right now. Less than four years ago, there was exactly one commodity exchange-traded fund (ETF). Today, there are nearly a hundred such ETFs tracking things like gold, silver, steel, natural gas, wheat, corn, pig's feet, decorative cakes, you name it.

Start playing a winning game
If there's one thing you can bank (ahem) on, it's that Wall Street always goes where the money is. When one strategy becomes less profitable, the guys and gals with the prestigious MBAs are quick to move on to the next thing.

In response to the credit troubles hurting his industry, John Stumpf, President and CEO of Wells Fargo (NYSE:WFC), recently quipped: "It's interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine."

Well said, Mr. Stumpf.

Here's the beautiful thing for you and me: We don't have to answer to clients or analysts on a quarterly basis. We don't have to obsess about the short term. We don't have to figure out a way to exploit an investment fad.

All we have to do is to focus on the old ways of making money -- the ways taught by Warren Buffett, Philip Fisher, and other legends. That is: finding great businesses at attractive prices and holding them for long periods of time.

That's it. That's the only game we play in our Motley Fool Stock Advisor service. And while it might not be as fun as chasing the next hot investment trend, it can be profitable in its own right. Since 2002, our Stock Advisor service is beating the S&P 500 by 35 percentage points. Click here and you can try the service free for 30 days; you'll have immediate access to all our recommended stocks.

Matthew Argersinger does not own shares of any company mentioned in this article. JPMorgan and Bank of America are Income Investor recommendations. Suntech Power is a Rule Breakersselection. The Fool does not play games with its disclosure policy.