Warning: Stocks Like This One Could Lose You 90% in Less Than a Year

As an investor, I get unsolicited "get-rich-quick" investment advertisements. Lately, I've been swamped with them, which makes me worry.

The economy is still struggling to find solid ground. The holidays are coming. And these two facts alone make investors more vulnerable to the kind of get-rich-quick pitches I see in many of the investment advertisements I receive.

Most times, I just throw them away without another thought. But once in awhile, out of curiosity, I spend a few minutes researching their recommendations.

 

For example, earlier this year I received a mailing that touted a "stealth" oil and gas play, apparently ready to pop for an 800% gain. The stock was Titan Oil & Gas (OTC: TNGS).

The promotion spoke volumes about the company's ability to reap huge profits in the energy sector -- soon! On close examination of Titan's financial reports, however, it was hard to see how that could happen.

For instance, in the quarter ended Nov. 30, 2010, the company could report no revenue and stated that it had "no products or services." And even its own financial reports admitted that conditions "raise substantial doubt about the company's ability to continue as a going concern."

Since then, Titan Oil & Gas has generated some revenue -- $15,323 from a 6% working interest in a handful of wells in Canada -- but by the end of May, it also showed a net loss of $111,608 for the previous nine months.

I don't mean to pick on Titan Oil & Gas. It may turn a profit someday. Unfortunately, since I received that promotion in the mail, the company's shareholders have not done well.

In the chart below, I've shown the performance of TNGS in comparison with one of my favorite "get-rich-slowly" securities in my Daily Paycheck portfolio -- Magellan Midstream Partners (NYSE: MMP). Magellan is a master-limited partnership (MLP) that produces a steady stream of revenue by transporting and storing oil and gas. It also pays a 5.0% yield.

As you can see in this chart, shares of TNGS have dropped more than 90% since February. Conversely, investors in MMP have seen a steady appreciation of 12% over the same period.

Not included in the chart are the $3.11 per unit in distributions MMP paid during that time -- an additional 5.5% return on an investment made at the beginning of February. Of course, dividend reinvestment would have yielded an even higher return.

It's been said that the two most powerful forces in the market are fear and greed. Maybe these emotions are hardwired into us as human beings. Fear is a good protective instinct, helping us avoid danger and unnecessary risk. Greed can help us accumulate more than we need in good times -- helping us to survive during lean times.

It turns out fear and greed, however, are poor allies when judging potential investments.

Patience, research and dividend reinvestment may not be able to compete with dreams of a lottery-like score -- but these are the building blocks to grow the kind of income we will need to rely on as we get older.

> Again, I don't mean to pick on Titan Oil & Gas. But it illustrates an important lesson: Whether it's an unsolicited advertisement in the mail or a pick from a trusted newsletter -- including mine -- it's important to do due diligence on your own to make sure the investment is suitable for your needs.

[Note: One common mistake is to think that stable income stocks can't deliver strong returns. I have a number of holdings with dependable, above-average yields in my Daily Paycheck portfolio that are up more than 40%.