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How to not lose your head -- and shirt -- when investing

October 30, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Low bank rates can be doubly dangerous for investors: They have already robbed Americans of most of the income on their savings and money market accounts, and the search for higher-returning alternatives can drive people to make foolhardy decisions.

Most people have heard the saying "a fool and his money are soon parted," but too often people don't apply this wisdom to their investment decisions -- probably because nobody likes to think of himself as a fool. However, there was a recent example of how too much buzz about an investment can turn people into fools.

What a difference a letter makes

On October 4, investors caused a brief but considerable rally in a bankrupt company called Tweeter. Why? Because social networking giant Twitter had announced that it would go public with the stock symbol TWTR. The ailing company Tweeter had a stock symbol of TWTRQ, with the Q being a mandatory indicator that the company is in bankruptcy.

It sounds kind of funny, but when a stock price runs way up and then way back down, it means some people lost a fair amount of money in a very short period of time. Here's how this kind of foolish mistake can be avoided:

  1. Sweat the details. Stock symbols are always cryptic, sometimes confusing, and often very similar to those of other listed companies. It turned out that one little letter -- Q -- made all the difference, and before investing in a company, it is worth confirming that you have the right stock symbol. Other details these investors should have picked up on include the fact that Twitter is not going public till mid-November, and when it does it will be listed on the NYSE, which does not list penny stocks.
  2. Don't believe rumors. It is possible this was all an honest mistake, but there is always a whiff of stock manipulation when something like this happens. It used to be an off-the-record whisper from a broker that could start this sort of mindless buying. Now it merely takes some hyped-up chat online to start the ball rolling. Keep in mind that these rumors are not just false, but they are likely planted specifically to get gullible investors to drive up the price of a stock.
  3. Do the math. Twitter is on track to top $500 million in revenues this year, so why would anyone think it was trading for pennies a share? A little fundamental analysis should reveal any blatant inconsistencies.
  4. Don't rush. People tend to make bad decisions when they feel rushed. People who mistakenly bought Tweeter no doubt thought they were getting the jump on their fellow investors. Turns out they were the ones who were jumped. Take your time -- and take a lesson from a couple other high-profile Internet IPOs. Groupon dropped to a fifth of its early value within a year or so of its launch, and has yet to fully recover. An even more successful stock, Facebook, saw its value drop by half within the first few months of trading.

As a postscript to the short-lived buying frenzy for Tweeter Home Entertainment Group, it has since changed its stock symbol to the company's initials, plus the letter "Q" to indicate it is in bankruptcy. One can only hope that investors seeing a listing for THEGQ don't believe they are investing in GQ magazine.

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