There is one fundamental rule on the idea generation process to get across to new retail investors:

Buy what you have researched.  Don’t buy what your friends are buying, or even worse, what someone is trying to sell you.

(For those with access to RealMoney.com, you could review my Using Investment Advice series.)

The point here is to become capable of doing the basic research necessary to make reasonable decisions.  You don’t have to make great decisions in order to succeed.  You do have to avoid making major errors, which requires a degree of skepticism toward the opinions of your non-expert friends, and modest hostility toward those selling investment products.

What led to this article was a eight-page glossy advertisement from a publication that I do not deign to name (I worry about lawsuits), about a company called GTX Corp [GTXO].  Now, maybe I need to refresh my free subscription to the direct mail preference service, which really cuts down on the amount of junk mail that I receive.

GTX Corp is an example of a company with a high valuation, and uncertain prospects.  There is no provision for adverse deviation.  It trades on the Bulletin Board, and here is its business:

GTX Corporation integrates global positioning system (GPS) technology into consumer electronics devices.  The technology allows for real-time oversight of loved ones.

Now, why don’t I like this company, aside from the advertisement that did not mention valuation, balance sheet strength, or any other risk factors?

• It trades at a high ratio of book, and trailing earnings don’t exist.
• It was created out of a merger with a failed mining company.
• Its recent financing this month offered equity interests far cheaper than the current market price.
• Their auditor is not a major auditing firm.
• Give the auditor credit though, they did not give them a “going concern” opinion, but instead expressed doubts.
• The stock is on the Nasdaq’s Threshold Securities list, so finding shares to short is problematic.
• Major shareholders are doing a secondary offering.
• The advertiser was paid $186,000 to do the ad by a third party.

I have no idea how good their GPS technology might be, but there are too many risk factors here to make me even consider a long position.

I am not here to beat on GTX Corp.  I am using them, and the guy who advertised them as an example.

• The advertisement had all manner of positive things to say about the technology and what it could do.  That’s fine, but what has it done?  Why doesn’t this corporation have significant revenues?
• Why does the ad use the scam language “as featured on” and “as seen in,” naming prominent publications and channels, when all he likely did was buy some slack advertisements at a late hour, or in regional editions?
• The ad compares the company to Garmin and other successful companies.
• The ad uses a bunch of emotive problems that the technology could solve.
• The ad puts forth a target price of $12 without any justification.

Buyer beware, and don’t listen to strangers giving you advice.  Cultivate networks of knowledgeable friends who are trustworthy, and avoid getting taken for a ride by slick-talking (writing) hucksters who pitch clever ideas to you.  Do your work, and buy cheap, boring ideas like I do.

This entry was posted on Tuesday, May 27th, 2008 at 12:26 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.