We're all looking to profit from our investing activities. After all, none of us would willingly hand over $1,000 today in the hopes of ending up with $250 tomorrow. Yet in the course of our investigation, we often find companies with a good story or a seemingly compelling valuation that end up as absolute investing disasters. To avoid being suckered in by the Siren songs, we need to know what to look for to distinguish legitimate values from value traps -- companies that might look cheap on the surface but in reality are value-destroyers.

Several such traps are out there simply waiting for you to fall into. If you can learn to identify and stay away from these snares, you and your money will be in a much better place. It usually takes a bit of digging behind the headlines to uncover the truth, but once you're there, you can learn to avoid most disasters before they become obvious.

Trees don't grow to the sky
There's a danger in looking at companies through rose-colored glasses and expecting a brief period of tremendous returns to last forever. For example, in January of this year, I first warned of the carnage surrounding stun-gun maker Taser (NASDAQ:TASR) and noted the risks of such rapid growth assumptions. That day, Taser closed at $19.64 a share. This past June, I followed that article up by mentioning that I'd almost rather be shocked by one of its stun guns than own its stock. After that piece was published, Taser's stock finished the session at $10.83. As I write this, Taser's shares are trading at $5.66 a stub. That's down some 83% from its all-time high, and even after this dramatic drop, it's still not a value play.

Rather than growing, year-over-year sales continue to decline, costs are escalating, and share counts just keep on increasing. As a result, per-diluted share earnings, once decent, have been virtually eliminated. With next year's earnings expected at around $0.12, even at these prices Taser is trading at some 47 times what it's expected to earn in 2006. Even its book value per share, below $1.70, isn't providing a floor at this level. From an SEC investigation and a major marketing change to expectations that its turnaround will take quite some time to materialize, it becomes quite evident that there's still some more room left to fall.

Congregating like cockroaches in the cellar
Unfortunately for investors, the Taser story isn't unique. There are several other companies in the down-but-not-cheap club. Body-armor purveyor DHB Industries (AMEX:DHB) comes to mind as a fellow member of that group. Now at about $3.78 a share after also tumbling about 83% from its high of $22.70 last December, its shares look enticingly cheap on the surface. With this plummet, DHB trades at a trailing P/E ratio of below 6, and that puts it in the territory of deeply cyclical companies like automaker Ford (NYSE:F) and steel giant Nucor (NYSE:NUE). But as is often the case with cyclicals, DHB looks cheap only through the rearview mirror.

In DHB's case, its executive compensation plan simply adds fuel to the fire. Thanks to what looks like cronies acting in place of an objective board of directors working on behalf of shareholders, CEO David Brooks was handed warrants to buy more than 5 million additional shares at a mere $1 per share, dramatically below even the company's current price. With DHB's board apparently so willing to enrich insiders at the expense of shareholders, even options-happy technology giant Cisco Systems (NASDAQ:CSCO) looks tame and shareholder-friendly by comparison. When executives like DHB's destroy value that rightfully belongs to the owners of the company, virtually no price is low enough to make the company worth purchasing.

Skeletons in the closet
Just because a company's shares may move up as well as down, that doesn't mean the company is a worthy investment. Consider the case of pawnbroker EZ Corp (NASDAQ:EZPW). While it's well off its lows for the year, its dual-class share structure, its deals with related parties, and its apparently utter disregard for public shareholders mean that no matter what the market does to its stock, it's not worth owning. Its voting shares are completely controlled by a single shareholder. According to a tidbit buried on Page 19 of EZ Corp's most recent annual 10-K filing, the same controlling stockholder also happened to control currently bankrupt jewelry chain Friedmans as well as investment company Morgan Schiff.

Thanks to a related-party financial advisory agreement between EZ Corp and Morgan Schiff, the investment company was greatly rewarded for whatever success EZ Corp may have had, whereas the outside shareholders ... well, not so much. With no dividend, no vote to influence direction, deals that reward affiliates over public owners, and no regard for the interests of public shareholders, EZ Corp offers shares that simply have no intrinsic value, regardless of what the accounting numbers or the market may say.

Searching for real value
At Motley Fool Inside Value, we've seen all these shenanigans and more. It's our goal to help steer you clear of these traps, while we help to point you in the direction of legitimately value-priced companies with market-beating potential. By studying these destructive firms, however, we not only learn what to avoid, but we also often find values in their wakes. Take recent newsletter selection Accenture (NYSE:ACN), for example. A spinoff of former accounting giant Arthur Andersen, Accenture has been shining for subscribers. Accenture's stock has not only moved up in a period when the market has tumbled, but also its recent dividend puts cold, hard cash in the hands of investors. That's a nice contrast from those companies more interested in lining their executives' pockets than their owners'.

Value or value trap? That's the question our Inside Value team asks of every potential value opportunity. Each month, Inside Value chief Philip Durell delivers two stock picks to your inbox, and thus far, his returns are solid: Philip's picks are up 4.83% on average, versus 0.52% if you'd invested in the S&P 500 instead. For full access to all of our picks, just click here to begin a 30-day free trial to Inside Value. There's no obligation to subscribe whatsoever.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta had no financial position in any of the companies mentioned in this article. Nor was he the sole controlling shareholder of any supposedly public company, the recipient of significantly below-market warrants, or the subject of any SEC investigation that he's aware of. The Fool has a disclosure policy. Taser is a Motley Fool Rule Breakers recommendation.