On January 13, 2014, Google announced its plan to purchase Nest Labs, a maker of "smart home" products. The deal would close for a whopping $3.2 billion in cash.
Investors were pumped. They flocked to the stock ticker NEST... pushing shares up 1,900%.
Everybody wanted to get in ahead of the deal. There was no time to think. They acted on the news.
There was just one problem... The NEST ticker had nothing to do with Nest Labs, the company Google planned to purchase. It was the symbol for Nestor Inc., a penny stock dying a slow death.
Folks eventually figured it out. And Nestor has since delisted. But anyone who bought NEST late on the news lost a lot of money.
What's crazy is that this wasn't a one-off event. It's happened to countless other investors – and it could happen to you.
Luckily, following a simple rule can save you the grief: You must understand what you're buying.
Let me explain...
History is littered with examples of investors who didn't understand what they bought – and got burned. It happens because folks get sucked into acting fast... and they forget to think.
Something similar happened when social media company Twitter went public near the end of 2013. Investors rushed to get in on the first day of trading. Unfortunately, many of them rushed into the wrong stock.
You see, Twitter's ticker symbol – TWTR – had a near twin. Tweeter Home Entertainment traded under the ticker TWTRQ.
That one-letter difference was all it took. Tweeter traded around 70 times more shares than normal. And the stock jumped as much as 1,500% during the day. Like Nestor, it has since been delisted.
These kinds of mix-ups sound ridiculous. But even major companies can fall victim to name confusion. It just happened to electronics giant Samsung, the largest publicly traded company in South Korea...
At an event in China last week, Samsung's digital marketing manager made an announcement. Samsung would be partnering with Supreme, the latest super-hip, "gotta have it" clothing brand.
Sounds great, right? The only problem is, Supreme says the deal doesn't exist. Here's what the company said...
Supreme has not partnered with Samsung, nor will it open a flagship store in Beijing or participate in the Mercedes-Benz fashion show. These words are all from a counterfeit organization. Forged and distributed.
Samsung's digital marketing manager countered:
We are syndicating the Supreme Italian brand, not Supreme America. Supreme USA has no sales and marketing authorization in China, and Italian brands have obtained Asia Pacific (except Japan) Product sales and marketing authorization.
That post was later deleted... likely because it points to a major gaffe from Samsung.
It turns out that two brands both go by the name "Supreme." One is Supreme New York. The other is Supreme Italia.
Supreme New York was first. Most people consider it the legitimate holder of the brand. But Supreme Italia edged its way in, using the original company's logos while registering its own trademarks in Italy. The two have been fighting about it since.
Now, it's possible that Samsung purposefully partnered with a company most people would describe as a knockoff producer. But that seems unlikely. It's more plausible that this is a case of mistaken identity.
Samsung partnered with the wrong brand... And it didn't realize until it was much too late. It's just like folks who bought the "wrong Nest" or the "wrong Twitter."
All of this comes back to the basic premise: You have to understand what you're buying.
If you don't understand what a company is and what it does, you shouldn't be buying it. And remember, you almost always have time to think. You shouldn't buy or sell on impulse. That's how folks end up owning the wrong company, and only figuring it out after it's too late.
Thousands of investors have done it before. They've lost real money. But you don't have to make the same mistake.
Always understand what you're buying. It could save you from a potential investment catastrophe.
"Every business has a key metric that investors must understand," Dan Ferris writes. "Without knowing a business' key metric, you might as well take your money to Vegas and gamble it away." To make sure you always know what you're buying, learn about this number right here.
"One of the most valuable tools in any investor's tool kit is a basic understanding of corporate financial statements," Austin Root says. This is a crucial part of knowing your investments, inside and out... Master it with his simple "cheat sheet" right here.
Understanding what you're investing in is one step to becoming a successful investor. But before you invest even a dollar, you need to understand how to not lose it...
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