Some Investors Have a Real Gambling Problem

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Talbots' (NYS: TLB) share price recently hauled itself over the $3 mark for one reason: Sycamore Partners is mulling an acquisition of the struggling retailer. This may or may not come to pass, but it underlines a common, and extremely flawed, investment strategy: buying a stock on buyout rumors, regardless of its fundamental business strength (or weakness, as the case may be).

Once one stretches the long-term-memory muscle, it's easy to see buyout rumblings are incredibly common and the rumors frequently don't add up to a hill of beans -- and they frequently cause investors to lose money.

Let's take a walk down memory lane; some investors have gotten seriously burned by deploying their cash in this way.

RadioShack (NYS: RSH) got some investors' interest in 2010 as takeover buzz took over the airwaves. That stock's still trading -- and stumbling -- as a standalone company now. Check out its long-term chart, and you can see the ugly result for anybody who bought on that rumor and decided to hang around the Shack.

Also in 2010, some investors thrilled to the idea that Akamai (NAS: AKAM) could be acquired by -- oh, my gosh, wait for it -- search giant Google. Again, Akamai's three-year chart shows a high price in 2010 and subsequent losses for anybody who bought in and held on.

Last October, rumormongers gossiped about the idea that L'Oreal was checking outAvon (NYS: AVP) as a possible acquisition. Once again, this dreamed-up fantasy never came to fruition, and the chart tells the tale.

Talbots isn't the only stock that's been buoyed by the titillating concept of an acquisition. Chico's (NYS: CHS) is currently subject to rumor that it may have some private-equity suitors.

I'll give those who have invested in Talbots recently one piece of credit where it's due: Sycamore Partners -- and not an unnamed, unsubstantiated suitor -- is a truly interested party that fully disclosed its intentions. Who knows; maybe some folks who bought Talbots at its lows will luck out on this one, but there's still no guarantee.

And that's the problem: Investing this way is more like gambling and relies too much on luck. A far more fruitful, positive path to investment success is to seek out strong companies that are functioning just fine on their own business strength.

Just as with any addiction, the first path to kicking the gambling jones is to admit to the problem in the first place ... and then fix it. Let's hope more investors can see past the rumormongering "excitement" and focus more on long-term businesses than hoping for lucky breaks.

If you're in search of a truly exciting retail stock idea, one that doesn't need a buyout catalyst, check out the Latin American retail play our analysts identified as compelling: "The Motley Fool's Top Stock for 2012." The report is available as a free download right now for a limited time, so act fast.

At the time this article was published Alyce Lomaxowns no shares of any of the companies mentioned. The Motley Fool owns shares of Google and RadioShack.Motley Fool newsletter serviceshave recommended buying shares of Google. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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