Ever been blown away by a product, so much so that you had to own the stock? Ever been wowed by a technological innovation and just knew that the company that produced it would make a fortune?
Hold it! Keep that thought. And spend some time analyzing what else the company has going for it -- if anything. If the rest checks out fine, maybe, just possibly, your hunch will turn out to be winner. More likely, however, you might lose everything you've invested.
Stock boards and cocktail parties are filled with chatter about products that could lead to a home-run stock investment. Everybody seems to have parlayed such an innovation to a four-bagger.
So let me give you the other side of the equation. I am all about trying to help you make money, so let me show you when I lost money using this method. Maybe I can lose the money for you and save you yours.
Yesterday, as I was perusing through
Crain's New York Business
, a terrific source of stock ideas, I came across a write-up of a company that converts personal computers to televisions,
. Shares of this little Long Island company, which makes circuit boards that allow your computer to take part in the great online convergence, tripled this year, going as high as 38 when the company said it was going to reach an agreement with a big Internet broadcast company.
PC-TV a home run? I could only shake my head and laugh.
Five years ago, I happened on a company called
, a maker of tape products like the ones that the non-disk-drive portion of
currently sells. It was old-fashioned, boring technology, and it generated a subpar rate of return. But kicking around in the company was a device that turned a personal computer into a television.
The device sounded fantastic. But I wasn't content with simply seeing. I wanted to believe. I ordered one through
, which was using the device to allow people to dial into its own proprietary television network. The little device was inserted quickly and painlessly. And -- boom! -- in a corner of my PC was a TV.
I could barely contain myself.
We visited the company's headquarters. Insiders were buying the stock like mad, hand over fist. We were assured of a big marketing campaign. Here was a company with some of the best-laid plans I've ever seen.
We bought 10% of the company at around 5.
We lost everything. Every last penny. Nada. Total wipeout. Crushed beyond recognition.
While the company was busily producing the PC-TV device, the Imation division of
was developing a new tape standard that rendered Rexon's then-current product line, the one that it needed to finance PC-TV, worthless. The company had been blindsided.
The speed with which the whole thing unraveled still bothers me. Couple of bad quarters. A pulled credit line. A hopeless attempt to get investors to throw more money in. A Chapter 11 filing. Zed.
Optimists will read this story and say, Hah, if only they had executed, they could have been Hauppauge Digital -- which, at the very time we were making this investment, had just issued a competing product. But realists will recognize that there are many things that go into an investment, and only one is the revolutionary, exciting product line.
So the next time someone whispers to you about a new device that downloads movies right off the airwaves, packages them and put them in your computer, or whatever other dream device there may be out there, remember my Rexon story.
Sure you may catch the next Hauppauge. But isn't it more important to avoid the next Rexon?
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at