Great Concepts Aren’t Enough

My dumbest investment was in Solomon Technologies, a company making innovative electric motors. It was an exciting concept, but I lost all the money I invested. — D.A., online

The Fool Responds: When investing, an exciting concept isn’t enough. A company should ideally offer growing revenue and profits, a healthy balance sheet (meaning little debt and ample cash to meet obligations and fuel growth), one or more sustainable competitive advantages, and trustworthy, capable management.

In the case of Solomon Technologies, its visionary CEO ended up accused by the Securities and Exchange Commission (SEC) of defrauding investors through illegal trading. He subsequently left the company.

It’s always smart to research a company thoroughly before investing, but you can still end up surprised and burned on occasion. That’s why it’s important not to invest too many eggs in too few baskets. If your Solomon stake made up half your overall portfolio’s value, it would have been devastating, but if it was just a 10th or 20th of it, it would sting less. Many times, exciting companies you run across have not yet grown into profit-making enterprises and are worth avoiding.

In one of Solomon’s filings with the SEC, it noted, “We have never been profitable, and if we continue to lose money and do not achieve profitability soon, we may be unable to continue our business.” It also noted unpaid taxes and debts.