The share market is just as much a place for businesses to raise capital as it is to trade ownership stakes in businesses, which means since the start of time the market has attracted people looking to take capital from investors in return for a chance to own a share of their businesses or even just business plans.
Unfortunately the opportunity for easy money and a questionable regulatory environment when it comes to listings means a lot of companies coming to the market range from a dubious to dire quality.
Smart investors need to be aware of these potential land mines as they could blow up your portfolio’s returns as many will turn into loss-making capital sinkholes to be avoided at all costs.
If you don’t believe me, take a look at the Tech Wreck table below and some of the horrendous one-year returns.
Source: Mike King, prices accurate as at March 13, 2017.
All of the above companies are likely to have an exciting story to sell about how their technology products could be disruptive, connected to the cloud, Internet of Things, or ready to use mobile to make their investors rich, but some of them are little more than a tax on the gullible.
A fool and his money are soon parted, with most of the companies above wrecking their shareholders’ investments in what should be a textbook lesson as to why smart investors avoid the “story telling” end of the market like the bubonic plague.
So if you’re serious about creating lasting wealth for yourself and family it’s best to look for companies making profits and paying dividends – at the end of the day share prices will follow cash flows and profits either higher or lower over the medium term.
There are also plenty of profitable companies on the ASX that offer the opportunity for blockbuster returns over time if you know where to look!
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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.
You can find Tom on Twitter @tommyr345
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.