More Foolish Investing

We read these articles and sigh and sigh again. Why don't people open their eyes and learn how to invest properly? Get some training so you won't make these foolish, amateur investing errors!

The most recent article deals with crisis investing. A crisis happens, some company seems to have the solution, and people, thinking this company is the next microsoft, invest heavily. After a short time, reality hits, everyone realizes that company is more like Enron and those 'savvy' investors just lost everything they put in the company.

Here is a real world example.

The recently thwarted plot in Britain to blow up airliners headed for the U.S. was chilling news that put the world back on high alert. But with the fear - for many investors, anyway - came the search for opportunity.

Some evidently found it in a Bloomberg.com article about the newly apparent dangers of liquid explosives. Buried near the end was a reference to a New York-based start-up called TraceGuard Technologies (Charts). The company has developed a machine that it says can detect chemicals used to create explosives hidden in carry-on luggage without opening the bags. The wee bulletin-board stock - its market cap didn't crack $19 million - spiked up 64% on the mention.

Not bad for a company whose product doesn't exist except in prototype. The machines aren't in any airports and aren't likely to be there anytime soon - they don't have federal approval. Within days reality returned, and TraceGuard's shares plummeted right back to where they'd started.

OUCH. How foolish would you feel if you invested at that 64% spike? If that was you, you took one in the shorts!

Here is another example along with a good explanation of why so many fail at this kind of investing.

A lucky few may have bought and sold at exactly the right moments, earning themselves a bunch of cash and bragging rights at their next barbecue. But the more likely result for an investment in such a stock was a lot less glamorous.

And that is the peril for those who seek opportunity in calamity. Crisis investing may seem savvy, but for most individual investors it's a slightly ghoulish version of stock market gambling.

For starters, information travels too quickly and too widely these days for the average investor to get a leg up after a news event. "Things get priced into stocks very quickly," says Dirk van Dijk, research director of Zacks Investment Research.

And often as not, investors have some information, but not the full picture, says Pete Morici, an economist and professor of business at the University of Maryland. "Crisis investing is extremely difficult for the average investor, who doesn't have the ability to quickly find other information about the consequences of an event."

He cites the Gulf Coast hurricanes as an example: "People grossly overestimated the immediate rebuilding effect of Hurricane Katrina." Some stocks popped - Shaw Group (Charts), an engineering and construction firm, jumped 46% in the two weeks post-Katrina - but more languished.

For example, investors piled into Bermuda-based PXRE Group (Charts), a reinsurer some thought would gain from the higher premiums that often follow disaster. But they were treated to their own storm last February when PXRE's operating units were downgraded by rating agencies after the company reported higher-than-expected hurricane-related losses. The stock tanked by nearly two-thirds in one day and now trades around $4.

An investor that is properly educated wouldn't make these foolish mistakes. These are some of what we teach, how to make wise decisions. We'll never tell you what to invest in, but we will teach you how to invest properly.

Here's hoping you never fall into one of the traps shown above! Have a great and abundant day!