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.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
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

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links