aholtThis is the story of a story that’s been rewritten so often, I should’ve used disappearing ink. In an effort to capture the online investment juggernaut on paper, the editors of this magazine gave me $70,000 (virtual money, of course) and told me to have fun. That was almost two years ago, and the original assignment involved comparing the investment options available on AOL, Prodigy, and CompuServe. But halfway through the project, my research became outdated when Internet investing took off. Then, when the online services changed their offerings and pricings, my work was rendered further irrelevant. Months later, I was sent back to square one again as new companies launched and old ones merged or moved their offerings. This brings me to a key caveat: The online investing world changes really fast.

Lesson 1: Know what you want before you log on.

Head over to Yahoo!, key in “mutual fund” and you’ll find 58 entries; 1,789 listings for “stocks”; 1,136 for “money”; and 410 for “invest.” And that doesn’t count the newsgroups, chat rooms, forums, and so on dedicated to the art of separating would-be investors from their funds. You’ll discover places to download quotes, sites that will track your portfolio, corporate news, buy/sell signals, online brokers, and scores of “onetime-only opportunities to nab now.”

It’s overwhelming, enticing, intoxicating–and it’s all nothing but noise unless you already have a good idea of what you’re looking for. A buy-and-hold investor, for instance, can be easily seduced into trading on foolhardy tips, just because something’s there and it sounds so good. Before dedicating your life to cybertrading, spend time researching the basic theories of investing. Ask yourself: Do I prefer mutual funds or individual securities? Do I want to pick a few good funds and then leave them on autopilot? Do I want to research my own stocks, then trade regularly and rapidly? Am I using my nest egg–or just some fun money? Am I investing enough money to justify the cost of top-flight reporting services? How do I pick investments? Am I a fundamental investor who regularly checks company news and earnings? Do I chart price moves and buy with momentum?

Regardless of how you respond to these questions, there are sites for you online–but where you go is not the same for everyone. That’s why it’s vital for you to mull over your answers before you fire up your modem, money in hand.

I spent October 1995 in an investment information paralysis, which is ridiculous when you realize I was using play money. I’d jump from Wall Street Journal stories about what the pension funds were buying to Prodigy’s Stock Hunter, which picks stocks based on different theoretical models, to recommendations pushed by AOL’ s Motley Fool investment area. With no idea how to narrow my choices, i frantically surfed without buying a single share.

Lesson 2: You don’t have to do any of this.

Ironically, as more data is made available on the Web, more financial experts advocate adopting a passive approach to investing. Assuming that you’re a passive investor, it’s best to set aside a percentage of your portfolio for investing in stocks, and use it to buy an index fund. These funds hold broad baskets of stocks and are aimed at matching broad stock market indexes, such as Standard & Poor’s 500. Better yet, if you’re just hunting for an inexpensive index fund, you don’t need hourly market reports, timing recommendations, fundamental stock charts, and hundreds of hours of online research.

I finally bought an index fund by going to Morningstar, through AOL, and keying in “index.” There were 61funds to pick from. I called up Vanguard Index 500 Portfolio Trust, because Vanguard is known for low-cost funds. I also looked at Vanguard’s International Equity Emerging Markets Portfolio, on the theory that some of your money should be in foreign stocks. After reviewing its reports and learning the firm stuck close to its indexes–and didn’t charge marketing or high management fees–I clicked “add to portfolio” for both. I bought 1,000 shares of the international index at $10.41 a share and400 shares of the stock index fund at $54.32, for a total investment of $32,138.

In the 13 months I held these funds, without doing any research or trading, my money grew to $42,517. That represented a 33 percent gain for the domestic stock fund and a 29 percent gain on the international index. This turned out to be better than the returns for most of my subsequent picks. No fuss, no commissions, no hours spent tracking choices. Not a bad option if you just want to dabble in investing.

Lesson 3: Fast doesn’t mean timely.

Financial firms have raced to get online, but all haven’t been so quick about updating their data. Even some of the best reports, such as Strategic Investor on Prodigy and Morningstar on AOL, can be months out-of-date. In fact, you may get more timely information by pulling Value Line off the library shelf than by playing hide and seek online for hours. What’s more, be aware that free quoting services suffer from 15-minute or longer delays. If you’re a daily trader, get realtime quotes.

Remember those Vanguard reports I looked up? They were dated June 30, and I was hunting on October 25. Not good/

It’s October 27, 1995, and I’m scouting for current info. Again on AOL, I check the most active list on Nasdaq and come up with Pyxis (PYXS), a company I never heard of. It’s down $5 a share to 11 3/4 and has traded 13 million shares, which seems like a lot. What’s the story?

Click, click, and I’m in the company research window. l find a slew of stats and an article that tells me Pyxis makes automated drug-dispensing systems for hospitals. Sounds good. Back to Pyxis; its earnings report showed third-quarter results dropping from 23 cents a share last year to 22 cents now. Analysts were expecting 28 cents. And the CEO has quit. Dean Witter cut its rating from “accumulate” to “neutral.” No wonder it’s tanking.

But that news story notes that company earnings are down because it’s reinvesting in new installations. And cofounder Ronald Taylor is being talked out of semi-retirement to run the firm. Maybe it’s ripe for a takeover/By the time I get to the portfolio section, the share price has bumped up to 12 3/4. I hurry and buy 400 shares, for a total investment of $5,100.

Turns out, PYXS is a steady climber. By February 7, 1996, Cardinal Health Inc. bids to buy it. In May I receive .406557 shares of Cardinal for every PYXS share, and my holdings are worth $10,225. Nine months later, with Cardinal still climbing, my money has nearly tripled to $14,127. It’s the best investment I made; it proves that if you’ve got the time, the dime, and the willingness to act fast, you can find winners online.

Lesson 4: Don’t get a broker who’ll break you.

According to news reports, online trading may be the fastest-growing area on the Net with some 1.5 million accounts already established. As a result, there are dozens of brokers that allow direct online investing and that give discounts to customers willing to process their own trades. Although most brokers are already on the Web, some such as Charles Schwab & Co. and Fidelity Investments have their own networks and require their own software. To select the best broker, compare commission schedules for the kinds of trades you’re likely to make; ask about additional services and fees (such as charges for receiving your stock certificates or duplicate statements). Then go to the sites and scan the portfolio reports to find the one you like best. For ratings of online discount brokers, log on to The National Council of Individual Investors (com.primenet.com/ncii/) or the American Association of Individual Investors (www.aaii.org). (For more, see “Looking for a Discount Broker?”)

When I invested online for the story, I didn’t actually take my “money” to a real broker. Instead, l used AOL’s portfolio tracking feature to avoid the costs of trading. There are similar portfolio trackers available all over the Web, but they have limitations: Most only update prices, not dividends or, in the case of mutual funds, capital gain distributions that give you more shares throughout the year. lf you have an actual account with an online broker, however, your statement should reveal those distributions and give you an easy way to chart your performance against major stock indexes.

Lesson 5: A rumor Is a rumor is a rumor.

Lesson 6: Beware sleaze.

The financial market thrives on gossip, and avid cyber-traders can make junior-high-school students seem downright taciturn. Besides chat rooms, forums, and e-mail news lists, there are thousands of stock, bond, fund, and hot platinum-mine opportunities being touted at any given time.

The question is, how good (or bad) is gossip? Pretty bad, according to the North American Securities Administrators Association, which issued this warning: Don’t assume your online provider polices its investment bulletin boards; don’t buy thinly traded stocks on the basis of online hype; don’t act on the advice of a person who hides his identity; don’t be suckered by claims made about inside information; and don’t assume that because someone says they have checked something out that they have.

When you weed out the fishy leads and the cyber-hype, however, there’s still plenty of good information left. If you have the time, you may learn more about the mechanics of investing or get a feel for how others make their buying decisions. For instance, the scuttlebutt on CompuServe tends to draw more investment professionals; but on Prodigy and AOL, it’s easier to follow specific firms because messages are organized by company name. And on the Internet, the list servers are so voluminous that unless you’re careful, your e-mailbox may be clogged for months.

On January 23, 1996, Kestral Energy Inc. (KEST), an oil-well driller being pushed on AOL, catches my eye. “The corner is being turned; the price is right; the time is right” is the sum total of one message. So I flip to the news pages, where I find a PR Newswire story about KEST. (Warning: PR Newswire is not an independent news service. Its stories are written by the companies themselves.) I read about two great wells in Australia that should come online by March. I spend $15,000 buying in at $3 a share. Five months later, the price is up to 4 1/4 and my holdings are worth $21,250. If l were an active trader and online gossip hound, maybe I would’ve sold. But no, I’m still holding KEST in the fall of 1996. The price is 1 11/16 and I’m down $6,562.

lesson 7: Look for what you really want.

One benefit of using computers to invest is the ability to screen a list of stocks or funds that fit your financial needs. On the Web, you’ll find services that screen for as many as 300 criteria; the commercial services are more limited. In Prodigy’s Strategic Investor, you can hunt for earnings growth, dividend yields, and industry- and price-earnings rarios. Or you can use its preset screens that advise different methods of stock selection: There’s the Peter Lynch low-debt, high cash flow companies, the Graham and Dodd bargain-priced companies, and the William O’Neil fastest-growing companies. AOL, on the other hand, has the most limited screens (you can 0nly read preselected ones from the American Association at Individual Investors). CompuServe, which offers the most screens for sorting on your own terms, is my favorite tool of choice.

It’s late fall 1995; and I decide to sort and search for stocks in retail industries. With the holidays upon us, this is when retailers make money, right? In Prodigy I ask for re- ports on retail companies with fast-growing earnings per share, and I mark 11 reports that I want to download. I hit my first Mac user snag: Prodigy wants me to specify a DOS path. I get the reports anyway and discover a mixed bag of stocks. One, Caldor, shows good earnings but it’s in bankruptcy. Another, Crowley, Milner & Co., claims earnings are up 88 percent on 3 percent growth in sales. Sounds weird. I compare the 11 reports further and come up with the discounter Dollar Tree Stores. Its sales growth has been near the top of its class (at 45 percent annually for five years). Dollar’s price, at $27 a share, is well below its 52-week high of $36. I buy 400 shares and spend $10,800. Then, as another test, I go to Fidelity Investments and select one of its specialized funds that invests in a basket of retailing stocks. I buy 200 shares at $27.60.

In June 1996, when all the holiday data has been digested, I’m up 35 percent on Dollar Tree Stores. I sell. On the fund, I’m up 22 percent. I hom it. Sometimes it pays to pick stocks.

Lesson 8: Love is blind to investment data.

Cyberspace will give you more than enough trading information rope to hang yourself–so stick with your initial investment strategies. If, for example, you’ve decided to only buy stocks with strong earnings momentum, then don’t be swayed by sweetheart stories about stocks that don’t fit your profile.

My case in point: “Apple is history.” What person who still claims to be a card-carrying member of the I-Love-My-Macintosh cult could resist such a thread? Certainly not me. So in January, when I caught a CompuServe thread dedicated to the end of Apple, I chose to meet the gloom and doom with a buy order. Despite the online reports of company losses, of corporate heads rolling, and of long-term customers switching, it’s a “buying opportunity!” I told myself–proving once again that love is blind. I bought 100 shares at 36 5/8. As I write this, it’s selling at 24 5/8, and I’m out $1,200. I should’ve bought a new computer instead.

Lesson 9: Good information isn’t free, so only buy what you really need.

Once you’ve paid the price of admission to the Net or a commercial service, you can find such free information as lists of stocks and news. But you’re probably going to pay somewhere along the line. It’ll cost you, for instance, for detailed company reports, real-time quotes, and top-of-the-line screening. And once you can easily run off a charge card online, you’ll be nickel-and-dimed for a whole lot more information. So decide what you need, find an interface you like, and set an online expenses budget that’s in line with the amount of money you’re investing.

My cyber-experiment proved that when you’re willing to do your own research, a little money can go a long way. If you’re serious about stock picking, I think Prodigy’s Strategic Investor is a great deal at $14.95 a month. And if you pay a little more for commissions, a discount broker’s services can garner you much useful data. Besides, it’s still cheaper than what you’d pay a full-service broker to do your research.

Lesson 10: Bull markets don’t last forever, and neither do Web sites.

This piece of news may also be outdated by the time you read this article: All of the research I did for this report was in the context of the greatest bull market in the history of America. And for future investment articles, maybe it’ll be easier to find top sites–they will be those left standing after the bear.

After turnig an OK profit of $16,409 in a year, I can’t claim my modem helped me beat the market. But I have learned some things along the way, including this: Although your online tools will change with the marketplace, your investment philosophy shouldn’t.

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