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10 idiotic 'investment' ideas

From shares of bankrupt companies to vending machines stocked with gold bars, these are lemons to avoid. Don't pay for lunch with Warren Buffett, either.

By Kiplinger's Personal Finance Magazine

With so much flotsam littering the investment universe, we usually limit ourselves to pointing you toward the few stocks, bonds and funds worthy of your portfolio. But occasionally there come along new products so hazardous to your wealth that they merit a spotlight all their own.

In our Hall of Shame, we list the most idiotic investment ideas around. Some are gimmicks, others prey on investors' fears, and a few are downright silly.

Single-state stock ETFs

In a pitch to local pride, one promoter is trying to launch exchange-traded funds that track indexes of Texas and Oklahoma stocks. Those states are in better financial shape than most, but in each case the ETF would be dominated by energy stocks. Moreover, why should anyone care whether a producer of oil and gas -- which, after all, are commodities -- hails from Dallas or Tulsa rather than Denver or Dubai?

Two years ago, a different outfit toyed with StateShares. It was the same idea, but on a national basis -- that is, a separate ETF for each of the 50 states. It never came to fruition, and just as well: The wheels would have come off the Michigan fund. The New York portfolio would have gone the way of AIG, Citigroup, Merrill Lynch and the rest of what used to be known as Wall Street. Good businesses just aren't this local anymore.

REITs under lock and key

How can you fathom a real-estate investment that denies you the opportunity to gain from rising property values? In a "nontraded," or private, real-estate investment trust, you pay a fixed price (typically $10) for each unit. You get regular dividends from the income produced by rents from the offices, shopping centers or what have you. But the private REIT units don't trade -- except during certain windows of time when you can redeem them to the issuer on the issuer's terms.

No problem, you may say, given that the shares of traditional, publicly traded REITs crashed during the bear market (along with so many other kinds of stocks). Property values will surely recover, however, and prices of public REITs will rise to reflect those higher values. But private REIT investors get no such benefit unless the trust liquidates -- and even then, double-digit-percentage sales charges and high annual fees will erode the gains. Moreover, many private REITs have suspended all redemptions. That has the regulatory group Finra examining the sale and promotion of these illiquid deals.

Overpriced buffet with Buffett

No offense to the Oracle of Omaha, but the Toronto investment firm that recently won an auction for the right to have lunch with Warren Buffett definitely overpaid. Even a few hours with the Great One isn't worth $1.68 million. Surely, whoever attends from the victor, Salida Capital, will walk away stuffed with folksy Nebraskan wisdom. And Buffett, after all, isn't keeping the money, which is going to charity.

A smarter way to pick Buffett's brain is to buy shares of Berkshire Hathaway itself. With $1.68 million, you could have bought 17 shares of Berkshire's Class A shares (BRK.A, news, msgs) at recent prices of about $95,000 each. And the folks at Salida would have had enough pocket change left over to cover the cost of traveling to Omaha next May for Berkshire's annual meeting, where Buffett normally waxes eloquent for hours about the markets, the economy and his company.

Currency roulette

True story: One day not long ago, a New York City subway car was lined from end to end with ads for a get-rich-quick trading scheme involving the dollar, the euro, the British pound and luck. To play, you need $2,000, an understanding of all the flashing numbers on your computer screen and the chutzpah to guess when and whether the U.S. dollar will be worth more or fewer scraps of the world's other currencies.

This game goes on all day and all night, so you can wake up that much richer -- or poorer. It's like electronic roulette at a casino, except roulette is undeniably a game of chance, while promoters of currency trading claim that "forex" (foreign exchange) involves skill and knowledge. An expert told us that 90% of those who try this stuff lose money. That's unacceptable for something that's held out as an investment rather than a wager.

Absolutely awful

The phrase "absolute-return fund" casts a wide net, but be especially careful with funds that claim they'll beat inflation by a certain number of percentage points each year. Putnam recently launched four such funds, which it hopes will beat Treasurys by one, three, five or seven points annually by darting among bond and stock sectors.

Morningstar has studied past returns of similar strategies and found that managers have come up pitifully short of meeting their lofty goals.

Clipped by hedging

The marketing materials for principal-protected funds sing a mighty sweet song: Here, finally, is an investment that lets you collect the stock market's gains while protecting you from ever losing money! But keep listening, and the song slips out of key.

Take the S&P 500 Capital Appreciation fund (SSPAX). The fund is indexed only to the price gains of the Standard & Poor’s 500 Index ($INX), meaning investors miss every penny of the market's dividends. The costs of hedging against the possibility of negative returns eat up a big portion of whatever measly gains you might still be left with -- assuming the people in charge know how to hedge. Plug your ears to this sales pitch.

A bankrupt strategy

It's a common temptation: A famous company's shares are down to $1 or even less, but it's still in business and people and politicians are anxious to save it (yup, think General Motors), so you buy the stock. You figure the upside is way more than the pittance you're putting out, and you hope that the bankruptcy court is lenient or that the company manages to find new financing and stays out of reorganization.

The problem is that "old" stockholders generally get wiped out. Federal-Mogul (FDML, news, msgs), an auto-parts maker that was once in bankruptcy reorganization, is very much alive now. Its stock trades for $12, more than double the $5 it fetched early in 2009. But that's the new stock, issued post-bankruptcy. Those who paid as little as 15 cents or as much as $1.30 for old Federal-Mogul shares in 2006 and 2007 have only warrants that are nearly worthless, table scraps from the bankruptcy settlement. Similarly, you should avoid the shares of the old General Motors, now called Motors Liquidation Company (MTLQQ, news, msgs) as worthless.

Sucker bet on housing

In the chasing-a-horse-that's-already-out-of-the-barn department, Yale professor Robert Shiller has put his prestige behind two exchange-traded products that allow you to bet on U.S. home prices. Specifically, the MacroShares Major Metro Housing exchange-traded securities let you chase either three times the movement of the Case-Shiller index of home prices in 10 major U.S. cities or three times the inverse of the index's movement. Or at least that's the idea.

Because of technical quirks, the securities are unlikely to track the indexes properly. Instead, investor expectations for housing values will likely determine how the securities trade. But the timing of the products' launch -- just as the end of the long slide in housing prices is finally coming into view -- and their 1.25% expense ratios are the biggest strikes against this dumb idea.

Raw deal in real estate

It sounds as if we're picking on real estate, but here's another really wacky idea involving property: Buy a vacant house in a supposedly cheap neighborhood from one of those outfits that say "we buy ugly houses," pray for divine intervention and wait for a developer or speculator to take the property off your hands.

This isn't the same as buying a habitable house, a strategy that can work if you know something about being a landlord. We're talking about bricked-up hulks in derelict parts of cities that haven't been livable since the '50s. The Web pitches are enticing -- and the prices are superlow -- but even vacant properties will drain you for taxes, insurance and security.

Gold bars just left of the Snickers

Yes, vending machines that spit out gold bullion are now popping up in airports and train stations. So far, the "Gold to go" machines, dreamed up by German company TG-Gold-Super-Markt, have been installed only in Germany, but the company says it plans to expand to other European locations, notably Austria and Switzerland. Travelers can buy small coins, wafers and bars of up to 10 grams for a whopping 30% markup over market prices. In test runs the machines had some trouble giving the correct change.

This article was written by Elizabeth Ody and Jeffrey R. Kosnett for Kiplinger's Personal Finance Magazine.

From MONEYCENTRAL.MSN.COM published 0n 7/30/2009