Jason Ramage serves as an advocate and inspiration for young folks (at any age) who should start investing now.

Are the "Hot" Stocks Really "Cool"?

By Jason Ramage

The stock market is an amazing money-making machine. The hottest stocks in the hottest and newest industries have always attracted masses of investors hoping to catch a ride on the next great wave of revolution. At the turn of the century, it was industrialization. Auto stocks were as hot then as high-tech stocks like Dell and Yahoo! are today. Not very many of those companies still exist today and one can only wonder if people will recognize Lycos, e-Bay, or that once mighty Microsoft 50 or 100 years from now. Who has heard of American Cotton Oil, American Tobacco, Tennessee Coal & Iron, U.S. Leather, or U.S. Rubber? They were all part of the Dow Jones Industrial Average's original 12 stocks when it was first published in 1896, but have disappeared through mergers, acquisitions, and breakups.

If you want to take the risk that goes with making a quick buck, go ahead and catch a ride on e-Bay or Yahoo!. But if you want to start building wealth for a more financially secure lifestyle and eventual retirement, then you should adopt a long-term strategy of investing. You may think it strange to talk about retirement before or while you are in college. But the sooner you start thinking about it, the better. Even if Social Security should be there when we need it (don't count on it), it isn't much.

Today you will hear all the "experts" saying that the way to profit in this market is to buy the newest high-tech stocks that are in the fastest growing industries that will change the world of tomorrow. True, computer technology and the Internet are changing the world. However, these technologies do not usually become money-makers for their investors.

Peter Lynch, the former portfolio manager of Fidelity's Magellan Fund that rose 28-fold from 1977 to 1990, says that "if [he] could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable publicity, the one that every investor hears about in the car pool or on the commuter train--and succumbing to the social pressure, often buys."

There is nothing like watching a stock you own rise 10 or 20 points in a single day. On the other hand, there is also nothing like watching your stocks fall at the same speed! That is what happens with high-tech stocks riding high on little more than a new, whiz-bang technology and the CEO's prayer.

The problem with investing in high-tech is not that the industry is not growing. Exactly the opposite, actually. The Internet, computing, and digital technology are growing so rapidly that entrepreneurs and venture capitalists rush to get their own idea to the market. Competition heats up. And soon there are too many companies fighting for market share and profits usually decline.

The following are a few examples from Peter Lynch's, One Up One Wall Street: Oil services were hot in the late seventies and early eighties. "All you had to say was 'oil' in a prospectus and people bought the stocks." (This statement could be applied to the nineties by substituting "Internet " for "oil.") Lynch's specific example is a company called Tom Brown, Inc. The CEO, Tom Brown (who'd have thought?), proudly announced at a conference in 1981 that "you must hate money to be shorting (betting stock will go down) my stock. You'll lose your car and your house and have to go naked to the Christmas party." This drew a laugh from the crowd. However, it was the lucky one who shorted Tom Brown's stock over the next four years that laughed all the way to the bank! Tom Brown, Inc. plummeted from $50 in '81 to just $1! Come to find out, Tom Brown, Inc. was nothing more than "a bunch of useless rigs, some dubious oil and gas acreage, some impressive debts, and a bad balance sheet." (Lynch)