The Dirty Words of Investing
By Brian Hunt, Vice-President, Investment U

[Today's IU E-Letter is from IU Vice President Brian Hunt. His insights into what he calls the "dirty words" of investing might wind up saving you some money. Enjoy. Dr. Steve Sjuggerud.]

“You can’t go wrong buying raw land around here.”

Uh-oh.

I just bought five acres of undeveloped land in northeast Floridaand I think I got a good deal. But then I heard “you can’t go wrong with buying land around here” from a few friends.

I cringe when I hear “you can’t go wrong” I’ve fallen for it too many times. Those words usually mean an investment has too much optimism surrounding it And I probably won’t get a good deal for my investment dollar.

I have a list of things that scare me away from an investment They signal that something shady is going on, or that I’m too late to the party.

You can save yourself a ton of money by knowing a few of the “dirty words” of investing. These are common phrases that we’ve all used before But the best investors know they usually spell disaster.

Besides “you can’t go wrong,” here are a few more to look out for

1. “It’s the next revolution in technology!”

Warren Buffett is the one of the greatest investors of all time And he wouldn’t touch the “revolutionary” tech stocks in the late 90s.

Buffett had seen it before in the “‘tronics” boom of the early 1960s, when companies with a version of “electronics” in their name sold for over 100 times earnings. Companies like Vulcatron, Transitron and Videotronics were the hot stocks of the day.

Like Pets.com and Drugstore.com in the late 1990s, the “tronics” companies generated a lot of excitement, became wildly overvalued, and got crushed wiping out investors.

Buffett didn’t invest in the dot.com companies He knows when you hear about the “next revolution in technology,” it’s usually a bad investment idea.

(As a side note, we now have Amazon.com, Yahoo! and eBay all trading for over 100 times earnings.)

2. “My brother (mother, best friend) heard it at work… The shares are set to take off!”

My brother doesn’t know much about investing, but he’s always passing along investment information.

On my brother’s recommendation, I invested in a company called Titan Motorcycles. He knew it would be a great investment Now, the shares trade for less than one cent.

It took me a few more “hot tip” losses to learn one of the timeless rules of investing: Investing on hot tips and rumors is a sure way to lose money

The best hot tip is: There’s no such thing as a hot tip.

3.”It will come back…”

Have you ever bought a stock at $60 a share, watched it sink to $30 and said, “I’m not worried – it will come back.”

An investment that declines in value by 50% will take a 100% rise to get you back to breakeven and 100% returns are difficult to come by.

This is where stop losses are so valuable. If you have an investment that declines 25% in value it will take a more manageable 33% gain to get back to breakeven.

If you catch yourself saying “it will come back,” it’s probably time to sell and move on.

A Simple List to Keep You In the Money

- “You can’t wrong with”
- “It’s the next revolution in technology”
- “My brother said these shares are set to take off!”
- “It will come back”

The list of dirty investment words could be endless But keeping these four phrases in mind will save you a lot of money in the markets.

Good Investing,

Brian