Sep 29 2008
Psst- Buddy! Wanna recommendation?
Several years ago, some very good friends of mine and I were visiting over dinner. The husband said to me, “Hey, I know you are really into investing…”
“Yes?” I asked warily.
“Well, I got a tip today from a friend. He’s a salesman for a company out of Nevada.” The enthusiasm made his eyes shine. “He says we should buy this stock because it’s going to go out of the park. See, right now the slots take coins, right? I nodded. “But this company makes the chips to turn out machines that let you just use your credit cards and they say the all the casinos are excited about going into these things.”
“What’s its P/E ratio?” I asked
“What?” he said, befuddled.
“The P/E ratio,” I repeated patiently.
“I don’t know what that is,” he shrugged. “I just know this guy said this stock is going to be hot.”
“I’ll check into it,” I said, writing down the call letters.
“No,” said his wife, “Don’t miss out on this investment. We’re so excited about it that we bought $10,000 worth!”
I promised I would research it, and when I did the next day, I realized it didn’t even meet the basic criteria of my stock picks: the P/E was astronomical. They pestered me about it, though, asking several times whether I had jumped in with them. I assured them that I was watching it carefully, and I did, by asking them how it was going.
It soon got to be a painful subject. First it went up a little bit. Then it dropped steadily. A year later I asked about how it had turned out for them, and they bitterly answered that they had lost thousands.
That’s what happens when you don’t do even basic research. And research is essential to investing, especially with stock. A good mutual fund manager will do the work for you, an ETF will not. And since most people lack even the basic knowledge of investing, they get tied up in these kinds of back yard recommendations and then lose. It is dangerous to their long term wealth, and it is one reason why I was so against President Bush’s plan to put our country’s retirement into the hands of the stock market.
That brings me to the real reason for today’s column. Yahoo featured a September 22, 2008 article by Fortune that featured the top fastest growing companies. A novice investor might be all over that list, buying like crazy. For a researcher like me, the list is just a springboard for ideas. Out of the top ten, only one made my list of ones worth investing in. Tomorrow I’ll write more about it.
