At some point, you've probably received a breathless mailing hyping a little-known stock as the next great investment. It can be hard to resist the temptation of these come-ons; after all, they're not always wrong. But in the vast majority of cases, these pitches are little more than an invitation to lose money.

The five habits of highly unsuccessful investments
Most of the stocks these mailers promote are completely unknown, priced at the ultra-cheap fringes of the market. They look nothing like the stalwart, long-term performers you know and trust:


20-Year Total Gain

20-Year Average Annual Gain




Best Buy (NYSE:BBY)



Nike (NYSE:NKE)  






Deere (NYSE:DE)  



Kroger (NYSE:KR)



Back in 2007, I received a mailing touting California Oil and Gas, which was trading at the time for around $0.50 per share. As I read through the notice, I spotted five traits that raised red flags for me:

  1. The stock price was way too low. We've long advised readers to steer clear of penny stocks trading for $5 or less per share.
  2. The mailer's claims were too concrete. It promised that a deal with Chevron (NYSE:CVX) "will soon drive it above $20!" and that we could expect future recommendations to rise more than 30% in less than 30 days. If the author were really getting such results, why would he or she even need to make money hawking a newsletter? At the promised rate of return, a single $1,000 investment would grow to more than $6.8 billion in just five years.
  3. Its logic was puzzling. The mailer alleged that Chevron "has agreed to pay for 100% of this alliance." If true, how would that make the deal more profitable for buyers of California Oil and Gas? If California Oil and Gas had chipped in some money, wouldn't that investment entitle it to a bigger share of any resulting profits?
  4. The mailer's author went a little too wild with the Caps Lock key, claiming that this recommendation would make him or her "an Oil-Stock Legend!" The mailer also trumpeted, "Key Alliance Points to HUGE Profits for early [California Oil and Gas] shareholders." (Given all the other words that apparently merited capitalization in that sentence, why was "shareholders" left lower-case?)
  5. That dubious approach to grammar continued on the company's website, where it announced that it "is focussed (sic) on exploring High Yield Oil and Gas Prospects both Domestically and Internationally." When I clicked on a link for "Financial Statements," I found none. When I clicked on "Corporate Governance," I found only a few sentences, using the phrase "the highest levels of integrity" twice.

In the long run, California Oil and Gas may end up performing well for investors; at this point, I'm less than impressed. Its shares have not climbed to $20 and beyond, as my 2007 mailing suggested. Instead, they now trade around $0.04 per share.

Ask yourself this
If a tiny company with relatively few shares really were such a mind-boggling bargain, why would it even need to advertise? Wouldn't knowledgeable folks within the gas industry already have discovered its merits? And if there were such steady demand for its shares, wouldn't their price have risen, rather than fallen?

The author of the mailing listed the performance of six past recommendations -- over short periods. But how did those stocks fare over longer periods of time? And what proportion of the author's total picks do those six briefly successful investments represent?

Foolish investors always want to buy stocks for less than they're actually worth -- but an inexpensive share price doesn't always mean a stock is a good value. Even at $0.50 a share, California Oil and Gas might have been overpriced relative to its actual merits. Tellingly, the mailing's author never explained exactly how the company would suddenly increase its value 30 times over.

Let's get small
Not every small, obscure company is a bad investment. Tinier businesses have more room for growth, and little-known stocks have a greater chance of being mispriced or undervalued by the market, since they don't face the analyst scrutiny and frequent trading of their larger peers.

But the best small-cap companies always communicate fully, clearly, and honestly with shareholders. They never distort their prospects with unrealistic hype. And they're run by smart, disciplined, shareholder-friendly management, with an eye toward long-term value and performance.

Our Motley Fool Hidden Gems team has unearthed a promising crop of small-cap candidates, many of which have been beaten down to even more attractive valuations by the recent market meltdown. To discover all our carefully researched recommendations, and see our picks' full track record, try our newsletter service free for 30 days.

Longtime Fool contributor Selena Maranjian owns shares of Apple. Best Buy is a Motley Fool Inside Value recommendation. Best Buy and Apple are Motley Fool Stock Advisor picks. The Fool owns shares of Best Buy. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.