This is why you study the business first, the stock second
TechCrunch's Michael Arrington takes apart Video Professor's business model in this raw, heated post. Give it a read, and then ask yourself these two questions about each of the stocks you own:
1. Do I know how this company makes money?
2. Is ignorance or stupidity required to make a sale?
You'd be surprised how many companies depend on number two. Take banks. Credit card profits are often derived from the gullible. Don't believe me? Look at the fine print of the next credit card offer you get in the mail. You might see something like this:
"Balance transfer fee applies, minimum $5."
Anyone doing back-of-the-napkin math will quickly find that no one ever pays $5 for a balance transfer. These so-called deals instantly charge 3-5% of the balance. Thus, at 3%, you'll hit $5 after the first $167 transferred. Anything more and you're in bonus territory -- as in, a bonus for your creditor.
Don't get me wrong; I'm not calling banks out as scammers. Well, okay, maybe some banks. More broadly, I am saying that some credit cards are scams, and some public companies depend on scams for profits. We know because we've found and written about more than our share.
One of the best at this is my colleague Seth Jayson (TMFBent). He's a skeptic in the very best sense, and as a consequence he's outed craptastic ideas like this one. We should all be as diligent. We should shout from the rooftops when we find businesses built to bilk, and then short the living daylights out of them.
Thanks to Michael Arrington for reminding me of that.
FWIW and Foolish best,
Tim (TMFMileHigh and @milehighfool on Twitter)