The Scary, Exciting, Risk-Laden, Lucrative World of Fallen Angels

Wall Street today is like a field of battle littered with wounded tech stocks shot down by disappointing earnings or, in the case of most Net stocks, no earnings. If stocks were people, this would be a tragedy. But they are not, and this unpleasant sight in fact offers opportunity for investors.

Fallen angels. Turnarounds. Call them what you will, good companies that have stumbled and been trampled by the mob should always be considered by real investors. They can be home runs. They can be utter strikeouts. But if you are going to make money over the long haul, you need to move when the market offers you the chance. You should learn how to spot beaten-up stocks -- typically down at least 50% from their peaks -- that can recover. Tech today may offer such opportunities.

You cannot rely on Wall Street analysts and financial journalists to provide too much help in this matter. The same seers who failed to give you the heads-up before the fact tend also to be the ones who pull their buy recommendations or write the oh-the-pity-of-it-all stories after a company announces bad news. Read what they say but learn how to spot good bets on your own. This is tricky stuff and not for the fainthearted.

I talked with one forty-something growth stock investor who's had a fallen-angel partnership for more than five years, in that time compounding his investors' money at slightly more that 25% a year. So far this year, the fund is up slightly. He doesn't go short. He doesn't use enormous leverage. He tends to hold for at least one year so that his clients can get tax-advantaged long-term capital gains. ...