A Hedgehog Commentary

Dangers For The Internet Investor

12/09/97 - There can be no doubt that one of the most commercially valuable applications of the internet to date is in financial services. Thanks to the internet small investors have an opportunity to invest in ways that we never could have before. We now have access to financial information and resources that just a few years ago only major brokerages had. However, with all these new opportunities come new dangers. Actually, not so much new dangers but old ones in new packages. I'm speaking here of cons, touts, and hucksters.

I participate on some of the financial newsgroups. Thanks to this, I'm now on about a hundred email lists. Among all the various junk emails I now get are newsletters that are really fronts to tout some questionable investment opportunity. The typical format is a glowing write up on some company I've never heard of followed by a claim of an outrageous return within some few months. I suspect most of you who've been on the internet for any length of time have received similar junk. Most of you have probably trashed it without another thought, but since these things keep coming, I suspect that somebody out there is buying.

Consider, if these companies were really such promising investments, would they be sending out junk email at random? Of course not, they'd be keeping it for themselves and their friends. Some of these companies may well be legitimate, some of them may even have a future, but some are probably complete frauds and all of them are high risk.

In addition to these efforts to sell questionable companies, there are the efforts to manipulate the market. Anyone who's scanned a newsgroup has seen these kinds of messages. Typically, someone who owns a stock will try to hawk it on the net to get you to buy it so he can sell it at a profit (short sellers may try the opposite). Of course, these schemes work best on small companies with low float (number stocks available for trade). Just remember that to make money on a purely momentum investment, somebody has to get stuck having paid too much.

My own personnal opinion is that you should automatically avoid any company that you can't find a good deal of info about so that you can make an informed decision on their prospects. Lately, readers have been requesting reviews of some very small companies. Often, about the only thing I can find out about them is that they are losing money and their primary source of revenue is from selling stock. Even though some of them seem to have potential, I almost always shy away from recommending them. With the thousands of companies out there, there are certainly plenty of great investment opportunities available with companies that have a history. The problem of course is that we'd all like to make a killing and to make a killing you have to get in on a company's ground floor. The only way to do this is to either be a founder or take a chance on a company you know little about. This is gambling though, not investing. In investing, the odds on you making money should be better than even; in gambling, they're never better than 50-50.

If you think about it though, making a "mere" 20% gain every year would be a great deal, nearly double the markets historical average and enough to make even a small investor very wealthy, eventually. This may not be as exciting or as profitable as getting in on the ground floor of the next Microsoft but its a lot better than taking a bath on the next BreX.