10 idiotic 'investment' ideas

From shares of bankrupt companies to vending machines stocked with gold bars, these are lemons to avoid. Don't pay for lunch with Warren Buffett, either.

With so much flotsam littering the investment universe, we usually limit ourselves to pointing you toward the few stocks, bonds and funds worthy of your portfolio. But occasionally there come along new products so hazardous to your wealth that they merit a spotlight all their own.

In our Hall of Shame, we list the most idiotic investment ideas around. Some are gimmicks, others prey on investors' fears, and a few are downright silly.

Single-state stock ETFs

In a pitch to local pride, one promoter is trying to launch exchange-traded funds that track indexes of Texas and Oklahoma stocks. Those states are in better financial shape than most, but in each case the ETF would be dominated by energy stocks. Moreover, why should anyone care whether a producer of oil and gas -- which, after all, are commodities -- hails from Dallas or Tulsa rather than Denver or Dubai?

Two years ago, a different outfit toyed with StateShares. It was the same idea, but on a national basis -- that is, a separate ETF for each of the 50 states. It never came to fruition, and just as well: The wheels would have come off the Michigan fund. The New York portfolio would have gone the way of AIG, Citigroup, Merrill Lynch and the rest of what used to be known as Wall Street. Good businesses just aren't this local anymore.

REITs under lock and key

How can you fathom a real-estate investment that denies you the opportunity to gain from rising property values? In a "nontraded," or private, real-estate investment trust, you pay a fixed price (typically $10) for each unit. You get regular dividends from the income produced by rents from the offices, shopping centers or what have you. But the private REIT units don't trade -- except during certain windows of time when you can redeem them to the issuer on the issuer's terms.

No problem, you may say, given that the shares of traditional, publicly traded REITs crashed during the bear market (along with so many other kinds of stocks). Property values will surely recover, however, and prices of public REITs will rise to reflect those higher values. But private REIT investors get no such benefit unless the trust liquidates -- and even then, double-digit-percentage sales charges and high annual fees will erode the gains. Moreover, many private REITs have suspended all redemptions. That has the regulatory group Finra examining the sale and promotion of these illiquid deals.

Overpriced buffet with Buffett

No offense to the Oracle of Omaha, but the Toronto investment firm that recently won an auction for the right to have lunch with Warren Buffett definitely overpaid. Even a few hours with the Great One isn't worth $1.68 million. Surely, whoever attends from the victor, Salida Capital, will walk away stuffed with folksy Nebraskan wisdom. And Buffett, after all, isn't keeping the money, which is going to charity.

A smarter way to pick Buffett's brain is to buy shares of Berkshire Hathaway itself. With $1.68 million, you could have bought 17 shares of Berkshire's Class A shares (BRK.A, news, msgs) at recent prices of about $95,000 each. And the folks at Salida would have had enough pocket change left over to cover the cost of traveling to Omaha next May for Berkshire's annual meeting, where Buffett normally waxes eloquent for hours about the markets, the economy and his company.

Currency roulette

True story: One day not long ago, a New York City subway car was lined from end to end with ads for a get-rich-quick trading scheme involving the dollar, the euro, the British pound and luck. To play, you need $2,000, an understanding of all the flashing numbers on your computer screen and the chutzpah to guess when and whether the U.S. dollar will be worth more or fewer scraps of the world's other currencies.

This game goes on all day and all night, so you can wake up that much richer -- or poorer. It's like electronic roulette at a casino, except roulette is undeniably a game of chance, while promoters of currency trading claim that "forex" (foreign exchange) involves skill and knowledge. An expert told us that 90% of those who try this stuff lose money. That's unacceptable for something that's held out as an investment rather than a wager.

Absolutely awful

The phrase "absolute-return fund" casts a wide net, but be especially careful with funds that claim they'll beat inflation by a certain number of percentage points each year. Putnam recently launched four such funds, which it hopes will beat Treasurys by one, three, five or seven points annually by darting among bond and stock sectors.

Morningstar has studied past returns of similar strategies and found that managers have come up pitifully short of meeting their lofty goals.

Clipped by hedging

The marketing materials for principal-protected funds sing a mighty sweet song: Here, finally, is an investment that lets you collect the stock market's gains while protecting you from ever losing money! But keep listening, and the song slips out of key.

Take the S&P 500 Capital Appreciation fund (SSPAX). The fund is indexed only to the price gains of the Standard & Poor’s 500 Index ($INX), meaning investors miss every penny of the market's dividends. The costs of hedging against the possibility of negative returns eat up a big portion of whatever measly gains you might still be left with -- assuming the people in charge know how to hedge. Plug your ears to this sales pitch.

A bankrupt strategy

It's a common temptation: A famous company's shares are down to $1 or even less, but it's still in business and people and politicians are anxious to save it (yup, think General Motors), so you buy the stock. You figure the upside is way more than the pittance you're putting out, and you hope that the bankruptcy court is lenient or that the company manages to find new financing and stays out of reorganization.

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The problem is that "old" stockholders generally get wiped out. Federal-Mogul (FDML, news, msgs), an auto-parts maker that was once in bankruptcy reorganization, is very much alive now. Its stock trades for $12, more than double the $5 it fetched early in 2009. But that's the new stock, issued post-bankruptcy. Those who paid as little as 15 cents or as much as $1.30 for old Federal-Mogul shares in 2006 and 2007 have only warrants that are nearly worthless, table scraps from the bankruptcy settlement. Similarly, you should avoid the shares of the old General Motors, now called Motors Liquidation Company (MTLQQ, news, msgs) as worthless.

Sucker bet on housing

In the chasing-a-horse-that's-already-out-of-the-barn department, Yale professor Robert Shiller has put his prestige behind two exchange-traded products that allow you to bet on U.S. home prices. Specifically, the MacroShares Major Metro Housing exchange-traded securities let you chase either three times the movement of the Case-Shiller index of home prices in 10 major U.S. cities or three times the inverse of the index's movement. Or at least that's the idea.

Because of technical quirks, the securities are unlikely to track the indexes properly. Instead, investor expectations for housing values will likely determine how the securities trade. But the timing of the products' launch -- just as the end of the long slide in housing prices is finally coming into view -- and their 1.25% expense ratios are the biggest strikes against this dumb idea.

Raw deal in real estate

It sounds as if we're picking on real estate, but here's another really wacky idea involving property: Buy a vacant house in a supposedly cheap neighborhood from one of those outfits that say "we buy ugly houses," pray for divine intervention and wait for a developer or speculator to take the property off your hands.

This isn't the same as buying a habitable house, a strategy that can work if you know something about being a landlord. We're talking about bricked-up hulks in derelict parts of cities that haven't been livable since the '50s. The Web pitches are enticing -- and the prices are superlow -- but even vacant properties will drain you for taxes, insurance and security.

Gold bars just left of the Snickers

Yes, vending machines that spit out gold bullion are now popping up in airports and train stations. So far, the "Gold to go" machines, dreamed up by German company TG-Gold-Super-Markt, have been installed only in Germany, but the company says it plans to expand to other European locations, notably Austria and Switzerland. Travelers can buy small coins, wafers and bars of up to 10 grams for a whopping 30% markup over market prices. In test runs the machines had some trouble giving the correct change.

Where bailout money goes to die

Bailout architects have argued that the government is likely to get most of its money back. But it's becoming clear that taxpayers can kiss a chunk of that money goodbye.

When CIT Group (CIT, news, msgs), a medium-sized lender, faced the threat of bankruptcy recently, it raised an uncomfortable prospect for the officials in Washington managing the financial system bailout.

CIT got $2.3 billion in bailout funds last year -- yet it was still failing. And the government decided not to offer any more help. So if CIT declared bankruptcy, taxpayers would be out their $2.3 billion.

CIT has averted bankruptcy, for now, but its brush with insolvency highlighted one of the biggest risks of the entire bailout scheme: that taxpayers won't get their money back.

That problem has been overshadowed recently by some good news from firms like Goldman Sachs (GS, news, msgs) and JPMorgan Chase (JPM, news, msgs), which have paid back loans they got under the government's Troubled Asset Relief Program. So far, 34 companies have returned about $72 billion in TARP funds to the government, according to a bailout tracker maintained by journalism site ProPublica.

But nearly 700 firms have received bailout money, and many of them are still in rough shape.

To gauge how much bailout money may be at risk, we asked the Ethisphere Institute, a private research group that studies corporate responsibility, to identify who the biggest TARP-jumpers are likely to be. Ethisphere publishes a TARP Index Report, updated weekly, that measures the financial performance of all TARP recipients and calculates the "return" to taxpayers if the bailout funds are treated as an investment in the companies that got them.

By that measure, the government has been a poor investor, losing about $148 billion so far -- $1,233 per U.S. household. Ethisphere analyzed the same data, including results from the Federal Reserve's recent stress tests, to identify companies most likely to write off their debts to the federal government, either partly or completely.

Bailout architects like Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke have argued that the government is likely to get most of the bailout money back, which would make it more like an interest-bearing loan than a giveaway. But since the bailouts began last fall, a number of developments have made it clear that the feds -- and the taxpayers -- can kiss some of that money goodbye.

Ethisphere estimates that the following nine companies could end up costing the government the most when the final bailout accounts are tallied. Together, they account for nearly $220 billion in government bailouts, including TARP money and other funds.

AIG (total bailout received: $85 billion). It's hard to imagine a more complicated bailout than this monstrous money hole. The $85 billion includes $40 billion in TARP infusions and about $45 billion in loans from a government credit line. The Federal Reserve has paid an additional $47 billion for troubled AIG securities, which it hopes to resell at some point in the future. And American International Group (AIG, news, msgs) can still tap another $30 billion in credit lines extended by the government.

All of that money has bought the feds 79.9% of the insurance giant -- the most it can own without triggering accounting rules that would effectively nationalize the whole company. To pay back the government, AIG has developed a long-term plan to break itself up and sell off various insurance divisions and other assets.

But the horrible economy makes it a fire-sale market, with many bids coming in at less than half the asking price. So it could be three to five years before all of AIG's assets have been spun off. The government's exposure should shrink later this year, when the $45 billion credit line drops to about $20 billion. But Ethisphere predicts that the government will recoup far less than what it has plowed into the sinking firm.

Chrysler ($14.9 billion). In March, the government gave Chrysler $7 billion to stay afloat. That money essentially disappeared when the company declared bankruptcy in April.

Then the government provided Chrysler an additional $8 billion in financing to help it exit bankruptcy in exchange for an 8% ownership stake in the new Chrysler. The idea is that Chrysler will go public at some point, sell shares and buy out the government's position. But the return to the government will probably be well below face value, since it holds a relatively small stake in a company that's still endangered.

"The government will get back materially less than its $8 billion principal," says analyst Stefan Linssen of Ethisphere.

CIT Group ($2.3 billion). A string of strapped borrowers and a heavy debt load have nearly sunk CIT, which lends money to small and medium-sized businesses. The company escaped a bankruptcy in mid-July when bondholders provided fresh funds to keep it operating. But the interest rate is high, and many analysts think a bankruptcy filing is still likely. The Treasury Department, meanwhile, has hinted that it has already written off CIT's $2.3 billion in TARP funds.

Citigroup ($45 billion). The huge bank posted a $4.3 billion profit in the second quarter, but that's only because it spun off its valuable Smith Barney brokerage unit. Otherwise, Citigroup (C, news, msgs) would have lost money, and by almost any measure, it is a deeply wounded bank.

Citigroup's market value is just $16 billion -- one third of the government's cash investment in the company. For the foreseeable future, Citi is likely to wrestle with mounting losses on credit cards and other consumer loans. In addition to $45 billion in TARP funds, the government has guaranteed a humongous pool of dodgy Citigroup assets worth $301 billion.

Citigroup paid $7 billion for the insurance and must absorb the first $39.5 billion in losses. But after that, the government would bear 90% of any write-offs. That gives taxpayers long-term exposure to Citi's troubled balance sheet.

Chief Executive Vikram Pandit has insisted his company is on a path back toward sustained profitability, which will allow it to pay back the government. But Citi hasn't announced any timeline for paybacks.

General Motors ($50.7 billion). That long-forgotten $13.4 billion bailout last December was just a down payment, it turns out. Through bankruptcy funding and other expenditures, the government has nearly quadrupled its investment in GM (MTLQQ, news, msgs), in the process gaining 60.8% ownership of the new company. For the government to get all of its money back, Ethisphere calculates that GM would have to achieve a market value of $80 billion -- which would be 43% higher than GM's value in 2000 when the automaker was highly profitable and much larger.

With half as many divisions now and falling market share, it's hard to see how GM could ever reclaim its former glory (or profits).

Ethisphere estimates that taxpayers will be lucky if they get back $20 billion, a mere 40% of their investment in GM. GM argues that its implied market value, taking into account the prices its bonds are trading at and other factors, will allow a higher repayment, closer to $34 billion. And that could go up, GM insists, if the company does well.

GMAC ($12.5 billion). GM's car-financing arm also writes mortgages, which got it into deep trouble, forcing the lender to take more bailout money than any bank except for Citi, Bank of America (BAC, news, msgs) and Wells Fargo (WFC, news, msgs).

Part of GMAC's funding came with the auto bailout, to help ensure that car buyers who want to buy GM or Chrysler vehicles can get loans. But Ethisphere believes that with GMAC's vast exposure to two depressed industries -- cars and homes -- at least $5 billion of GMAC's TARP funds are a complete write-off.

GMAC says otherwise, insisting that it's taking the necessary steps to strengthen its business. "We intend to repay the full TARP investment over time and have been making scheduled dividend payments on the investment," says spokesperson Gina Proia.

Marshall & Ilsley ($1.7 billion). This bank holding company, parent of M&I Bank, is headquartered in Wisconsin, but it made thousands of housing, construction and commercial loans in Arizona, one of its target markets during the go-go years. With a huge housing bust in Arizona, many of those loans are now worth far less than their face value.

That makes M&I one of the most vulnerable regional banks. Ethisphere believes the government could lose $1.3 billion, more than three quarters of its investment in Marshall & Ilsley (MI, news, msgs).

The company says it is confident that the government will get all of its money back, plus dividend payments. The bank also argues that it has higher "capital ratios" than many other banks of its size and points out that it recently raised $552 million through an equity offering, "clearly indicative of the market's belief that the (government's) capital will be repaid."

Regions Financial ($3.5 billion). This Birmingham, Ala., bank has been losing a bundle from bad mortgages and other loans, mainly across the South. And its CEO said recently that losses are likely to get worse for the foreseeable future.

Ethisphere believes taxpayers will be lucky if they get half their money back. A spokesman for Regions Financial (RF, news, msgs) says the bank plans to pay back its government loans in full, pointing out that the company has $6.9 billion more in reserves than the required minimum, and recently raised $2.5 billion in the private markets.

Zions Bank ($1.4 billion). Utah has fared relatively well during the recession, but this Salt Lake City bank hasn't. That's because its core markets include California, Arizona and Nevada -- ground zero for the housing meltdown.

Zions Bancorp (ZIONS, news, msgs) has lost nearly $900 million so far this year and remains exposed to housing woes. Ethisphere tallies Zions as another 50% write-off, meaning taxpayers might get back just $700 million.

The company says it has plenty of earnings power and reserves to offset future losses, and points out that it recently raised $511 million in capital from the private markets."Zions believes the company has the long-term capacity to repay TARP in full at the appropriate time," says spokesman James Abbott.

Big changes for state tax laws

To bridge budget gaps this year, several states are levying large taxes on high-income earners and raising sales taxes. But a taxpayer group sees flaws.

Think millionaires are the only folks facing tax hikes this year and next? Think again. At least half a dozen states raised income tax rates for their highest earners this year. In many cases, the increases affect employees earning $150,000 or less annually.

"I wish we had a better term for these taxes than millionaire taxes because the threshold in which they kick in keeps dipping lower and lower," said Joseph Henchman, tax counsel at the Tax Foundation, a nonprofit taxpayer group that monitors federal, state and local levies.

The Tax Foundation released its first midyear analysis on state taxes July 29. The organization typically publishes annual reports. This year, however, the organization released an early review due to the large number of states that have changed their tax codes in the past several months. The most high-profile example is California. The state faced a $24 billion budget deficit. Earlier this week, California Gov. Arnold Schwarzenegger cut spending by $16.1 billion in order to balance the state budget and stop issuing IOUs to vendors. Five months ago, the state also raised income taxes for all brackets by 0.25 percentage points, retroactive to the start of the year.

California is far from the only state to raise income taxes to balance the budget. Hawaii, New York, Delaware, New Jersey, Oregon and Wisconsin all raised taxes on workers in the top income brackets.

• Hawaii: The state added three new income tax brackets in May. Before the changes, the state levied an 8.25% tax on all income above $48,000 a year. Under the new rules, which are retroactive to Jan. 1, income of $150,000 or more is taxed at 9%. Wages greater than $175,000 are taxed at 10%. Incomes of $200,000 or more are taxed at 11%.

• New York: The Empire State raised taxes on earners making $200,000 a year or more. Workers earning $200K saw their state taxes increase from 6.85% to 7.85%. Workers earning $500K per year saw an even greater increase, from 6.85% to 8.97%. The new rates are retroactive to the start of the year and are intended to last three years. They do not include local taxes. Cities such as New York City charge heads of households as much as 3.2% on all annual income over $60,000.

• Delaware: This state increased its top income tax rate a percentage point to 6.95% in July. The new rate, which impacts those earning more than $60,000 a year, is expected to take effect Jan. 1, 2010.

• New Jersey: The Garden State levies the highest property taxes in the nation. The state now also has the distinction of being one of the most expensive places for "millionaires" to live in terms of income tax. The state added three new tax brackets this year for earners making $400,000 or more. The income tax rate for employees earning $400,000 jumped to 8% from 6.37%. Those earning $500,000 will pay 10.25%. Workers making seven figures or more will pay an income tax rate of 10.75% on every dollar at or above the $1 million mark. The new tax rates are intended only for the 2009 tax year and are retroactive to Jan 1.

• Oregon: This state adopted two new brackets for top earners. Now, residents earning more than $125,000 will pay 10.8% instead of 9%. Those earning more than $250,000 will pay 11%. The new rates apply to tax years after Jan. 1, 2009, and before Jan. 1, 2012. In 2012, the state plans to reduce the 10.8% rate to 9.9%. The impact of the hikes may not be as bad as it first appears, however, since Oregon does allow residents to deduct federal taxes from their state taxes.

• Wisconsin: In June, the state added a new tax bracket for people earning more than $225,000 a year. The tax rate on these earners rose from 6.75% to 7.75%.

The state tax hikes combined with proposed federal increases on high-income workers may effectively raise the marginal tax rate well above 50% for those in the top brackets. In states with "millionaire taxes," many may see their taxes jump to 55%.

States are overhauling their tax systems in an attempt to bridge massive budget gaps. High unemployment, combined with plummeting property values, last year's stock market declines and reduced consumer spending, has left many states facing revenue shortfalls of crisis proportions. Receipts from income taxes on income, property, sales and capital gains have fallen drastically for many states.

"Obviously states have been having trouble trying to balance their budgets right now," said Mark Robyn, a staff economist at the Tax Foundation.

Tax Foundation economists say the focus on hikes for the highest earners may backfire for some states. Raising taxes on people earning above $100,000 a year -- about 126% more the average American's annual salary of $44,254 -- does give states more income in the short run. But in the long run it can discourage high earners from producing more, curb their business investments and push them to move to nearby states with lower income tax rates, said Henchman. Relying on high earners can also leave states vulnerable to future budget shortfalls, since high earners tend to rely more on capital gains and bonuses to pad their incomes -- both of which fluctuate wildly depending on the state of the economy and the markets.

"Rather than just take a politically unpopular minority of people to fund their services, they should focus on broad-based taxes," said the Tax Foundation's Robyn. "That is really only a temporary band-aid that can hurt economic performance in the long term."

Many state officials say they have little choice but to raise rates on the rich. Many argue that they can't cut state services any more and need to raise revenues somewhere. They're loath to raise corporate taxes for fear that businesses will cut back on hiring.

Wages have remained stagnant for many in lower income brackets. And many state officials fear that additional taxes levied on working-class or middle-class consumers will only further curb consumer spending, reducing both business profits and tax receipts.

Still, some states are not hoping that the "rich" will solve all their budget problems. Other states are turning to sales tax increases and additional taxes on alcohol and cigarettes to pay for services. Massachusetts, for example, has raised its sales taxes 25% to 6.25%. California has raised its sales tax to 8.25%, the highest in the nation.

The danger in raising sales taxes, of course, is that struggling Main Street businesses will suffer as their goods become more expensive than those in other states.

"This is definitely going to be a problem going forward," says Kail Padgitt, an economist at the Tax Foundation focusing on sales tax. "In Massachusetts, it's easy to drive over to New Hampshire (where there is no sales tax) and purchase goods there. This can hurt the state's competitiveness."

Not all states are responding to budget shortfalls with tax hikes. Maine actually plans to lower its tax rates for high-income earners starting Jan. 1, 2010. Workers earning annual salaries between $20,150 and $250,000 will see their rate drop from 8.5% to 6.5%. Employees earning more than $250,000 a year will see their rates decrease to 6.85% from 8.5%. Vermont and North Dakota are also reducing income tax rates this year.

Those who didn't see tax increases this year, however, could see them next year. As unemployment continues to rise, states will see more pressure on their budgets. That could lead to additional shortfalls and tax increases, said Henchman, of the Tax Foundation.

"Right now a lot of states closed their budgets gaps," he said. "But given that the national economy, if it has recovered, is only starting the recovery, the fact is that state government revenues will not be bouncing back during fiscal year 2010. At best they will plateau and, at worst, budget gaps will continue to open, requiring spending cuts or tax increases."