Motley Fool: Beware get-rich-quick shares

THE LATEST NEWS FROM THE MOTLEY FOOL

The Motley Fool started as an irreverent investment newsletter and has grown to become America's most popular personal finance and investment website. Anyone who follows its philosophy is called a "Foolish investor".

WARNING: shares can go down as well as up. We're not trying to make people panic here, but in these go-get-'em days of ever-rising stock markets, it is well worth keeping that in the back of your minds.

This is in the week that the London share market hit yet another new high, but rising on a relatively narrow front. Telecommunications companies still lead the way, and this week saw yet another surge in their share prices. Investors are expecting the fixed line companies to continue to benefit from the explosion in internet usage, and are pushing the share prices ever higher. The mobile phone penetration rate is still rising.

If you've recently had a second phone line installed at home or work specifically for internet use, you'll know why the share prices are on the rise. If you've just become mobile, apart from now having faster reflexes (a recent Bristol University study showed), you'll know why the mobile phone companies are popular investments. The money you are spending is making shareholders quite happy.

While telecommunication and internet companies are riding the crest of the stock market wave, at the other end of the scale things are not looking too rosy. The troubles at Marks & Spencer have been well documented, and although the share price was given a much-needed boost this week, it is still well off the 1997 high of 665p. J Sainsbury, once the undisputed supermarket leader, has seen almost 20 per cent wiped from its share price in the first three months of this year. This followed a downbeat post- Christmas trading statement, and confirmation of a continuing of the tough competitive environment. Investors in these great high-street names will know all about the potential pitfalls of stock market investing.

Many so-called "value investors" are finding it difficult to match the returns of the overall stock market. Many of the telecom/internet shares are seemingly defying valuation models, and the value investor has been forced to watch the excitement from the sidelines.

However, all should not be lost for the patient long-term investor. While telecom/internet stocks are providing a lot of quick gains, remember that the true measure of success in the stock market is performance over an extended period of time. Grabbing 50 per cent in a month means nothing if the stock you are investing in tumbles 75 per cent or more over the next three years.

While the temptation to put a substantial portion of your portfolio into what appear to be the new stars is strong, as a long-term investor you should be cautious and diligent. Make sure that you understand the business model and the prospects for the company. Consider competitive threats. Think of all the new entrants that will try to gain market share by offering better prices or better service. Can the company's management team withstand these challenges? After considering these factors, place your money only in companies that you expect to generate more earnings (or better yet, free cash flow) than you are investing.

In the short term, higher and higher stock prices aren't necessarily indicators of value creation, as investor sentiment and high hopes sometimes override rationality. Over longer periods of time, however, aberrational pricing usually isn't sustained as prospects and opportunities become better defined. Many of what look like dynamic growth opportunities trading at unheard-of multiples of revenues will flounder and create substantial losses.

At the same time, some less-well-known companies with regular 10 per cent -15 per cent earnings growth at low earnings multiples will turn out to be the true stars for investors.

The UK Motley Fool is at www.fool.co.uk

ASK THE FOOL

I want to make some money on the stock market in the next six months. What's the best way to go about it?

KB, London

Stop right there. Do not pass Go, do not collect pounds 200. The stock market is not some get-quick-rich scheme. Six months is far too short a time- scale to be considering investing in the market. The Fool recommends that you should have a minimum investment period of three to five years, the longer the better. Luck will be too much of a factor over anything less. Remember that when you are buying shares, you are taking a part ownership in a company, and not playing some short-term share price game.

Send us your question and if we publish it, you'll win a Fool baseball cap. E-mail to UKColumn@fool.com or post to Motley Fool, The Independent On Sunday, 1 Canada Square, London E14 5DL.

NAME THAT COMPANY

The first five correct answers out of the hat win a super de luxe black Fool baseball cap.

This Anglo-Norwegian engineering and shipbuilding company has suffered huge losses. The CEO had to go in the end of 1998. Much of the trouble can be traced to the acquisition of Trafalgar House in 1996. What is it?

Answers to UKColumn@ fool.com or snail mail to Foolish Trivia Quiz, Independent on Sunday, 1 Canada Square, London E14 5DL.

Last week's answer: Yahoo!

DUMBEST INVESTMENT

Send us your smartest or dumbest investment story. If we publish it, you'll get a free copy of the `Motley Fool UK Investment Guide'. E-mail to UKColumn @fool.com or snail mail to Motley Fool, The Independent on Sunday, 1 Canada Square, London E14 5DL.

In February 1996, I bought shares in Powerscreen International at 387p. They rose to 763p, and I fell in love with the shares. In early 1998, the firm announced a shock profit warning and the shares lost 50 per cent of their value in a day. I sold out in February 1998 at 218p.

BJ, London

Never fall in love with a company. You should check its progress by looking at its interim and annual reports. In the case of Powerscreen, a look at their cash generation for 1996 (or lack of it) may have alerted you that their earnings were not all they were made out to be.

PROMOTED VIDEO
Extras
indybest
Travel
Flocking round: Beyoncé, Madame Tussauds' latest waxwork, looking fierce in the park
travelIn a digital age when we have more access than ever to the stars, why are waxworks still pulling in crowds?
Arts and Entertainment
tv
Arts and Entertainment
Judi Dench appeared at the Hay Festival to perform excerpts from Shakespearean plays
tvJudi Dench and Hugh Bonneville join Benedict Cumberbatch in BBC Shakespeare adaptations
Sport
Is this how Mario Balotelli will cruise into Liverpool?
football
News
Ronahi Serhat, a PKK fighter, in the Qandil Mountains in Iraqi Kurdistan
i100
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Poet’s corner: Philip Larkin at the venetian window of his home in 1958
booksOr caring, playful man who lived for others? A new book has the answer
Arts and Entertainment
Exhibition at the Centre Pompidou in Metz - 23 May 2012
art
News
Matthew McConaughey and his son Levi at the game between the Boston Red Sox and the Houston Astros at Fenway Park on August 17, 2014 in Boston, Massachusetts.
advertisingOscar-winner’s Lincoln deal is latest in a lucrative ad production line
Life and Style
Pick of the bunch: Sudi Pigott puts together roasted tomatoes with peppers, aubergines and Labneh cheese for a tomato-inspired vegetarian main dish
food + drink
Arts and Entertainment
Alfred Molina, left, and John Lithgow in a scene from 'Love Is Strange'
film
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Quant Analyst - C++, Boost, Data Mining

£25000 - £35000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

Service Desk Analyst- (Desktop Support, Help desk)

£25000 - £35000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...

Junior Quant Analyst (Machine Learning, SQL, Brokerage)

£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst (Machine Lea...

UNIX Application Support Analyst- Support, UNIX, London

£45000 - £55000 per annum: Harrington Starr: UNIX Application Support Analyst-...

Day In a Page

Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

Waxing lyrical

Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
From slow-roasted to sugar-cured: how to make the most of the British tomato season

Make the most of British tomatoes

The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

Mackay, Moody and another grim day for English football

The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
La Liga analysis: Will Barcelona's hopes go out of the window?

Will Barcelona's hopes go out of the window?

Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape