Cancer insurance from Family Heritage Life

A lot of stupid things happen in the name of good investing.

That's because typical consumers of financial services believe they are doing the right thing and have come up with logic to back up their decision and support it as being smart.

But investing is not as easy as "having good intentions," and a few recent letters about Stupid Investment of the Week columns bear that out.

So this week, in celebration of the fourth anniversary of this column, Stupid Investment of the Week answers some recent reader mail, where some "average investors" — the audience for this column — sounded off about how my advice, or their outcome, turned out "less than ideal."

Q: "In your column [on cancer insurance from Family Heritage Life], your statement 'The return of premium raises the consumer's cost' easily qualifies as Stupid Statement of the Week. A return of premium feature in an insurance policy doesn't raise the consumer's costs, it lowers them ... to zero! There is, indeed, an additional cost for the feature, but that additional cost is included in the return of premium. The consumer gets back every penny paid in. No cost." — Bob W.

A: Bob doesn't say if he's in the insurance business or if he's just a customer, but he sure has swallowed the Kool-Aid passed out by people selling return-of-premium policies.

Let's put this in round terms, not specific to the Family Heritage plan but aimed at helping people understand return-of-premium policies.

Let's say consumers could buy $100,000 worth of whatever particular term coverage they want for a premium of $100 a month. They are then offered a return-of-premium policy where the same hundred grand in protection now carries a monthly premium of $125.

Whether you get the money back or not, the cost has gone up, and in more ways than one.

The primary definition of "cost," according to the three English dictionaries in my office, is "an amount paid or required in payment for a good or service."

Premium return or not, insurance coverage has a cost, namely the very real outlay of cash to pay premiums. The premium return doesn't happen for up to 25 years.

That means there is also a tremendous "opportunity cost," an economic concept that represents the value being given up in order to acquire something. That's an important consideration for insurance policies, because the consumer who saves and invests the premium has the opportunity to use the money as a form of self-insurance, or can simply save it.

There are plenty of bad insurance policies where the buyer pays much more, over time, than the benefits are worth. But even in a case of a return-of-premium policy, consumers should consider if they are better off paying for the coverage or investing the premium dollars.

One of the biggest lessons from the first four years of stupid investments is this: Any time an investment or financial product is pitched as free or "no cost," figure out how the people involved are being paid, because they're not doing their jobs for nothing, and you can bet you're paying somehow. That doesn't automatically make the investment bad, but it quickly cuts to the heart of a bad sales pitch.

Q: You picked on Amish Naturals (AMNT) because someone printed a brochure about it? What about the product, what about all of the good technicals? I lost a bundle because of your column, but I will make it back because you created a great buying opportunity. — Mike in Montana

A: One of the hardest things about this column is finding a reason why a consumer might buy a stupid investment. Without a premise for either buying or holding something, there's no sense writing about it, which is why the world's worst mutual funds or dreadful, bankrupt stocks typically don't make the grade.

If average investors learn about a stock through a brochure and buy it as a result — and if the booklet is horse-pucky — getting caught in the hype machine may indeed be the biggest problem for shareholders, especially when a company's fundamentals are thin to nonexistent.

Investors who truly believe in the stock should, perhaps, be more upset with the people publishing the brochure to manipulate the price for their own benefit. The pop they created has an inevitable give-back. Nobody minds when the commentary is positive and pushes the stock up; they shoot the messenger only when he's delivering bad news.

Disagreement makes a market; one investor is buying just as another is selling. Stock investors can benefit from examining those disputes, combating the "other side's" arguments to test their own. If you still have that confidence after listening to what the other side has to say — as Mike does — then you don't need an arbiter of stupid; you can handle the job yourself, possibly proving me wrong in the process.

Q: I am a 75-year-old widow who owned some notes from American Business Financial Services. They are in Chapter 7 since May 26, 2005. I cannot get any info about this. ... Shouldn't the courts see fit to compensate us in any way? There must be money that is due us. — D.Z.

A: Investment notes from American Business Financial Services were the very first Stupid Investment of the Week. Advertised in many big newspapers around the country, and with thousands of happy investors, the prospectus made them look like a Ponzi scheme to this skeptic.

But the ABFS notes story keeps getting stranger, even after the company's death. (ABFS went out of business a few months before the Chapter 7 filing.)

Late in February, the court-appointed trustee charged with recovering money for ABFS creditors actually sued hundreds of people who have been waiting to get a payment from the bankruptcy court. Specifically, the trustee filed suits against 370 of the 26,000 people who bought unsecured ABFS notes, because the selected investors had pestered the company into coughing up unpaid interest or paying off over-matured debt.

The investors are being asked to give those payments back, so that the money can become part of a bankruptcy case that, to date, hasn't paid anybody but the lawyers and the lenders.

Pursuing that settlement would suggest that the trustee believes there might someday be a restitution pool for investors, but it's not likely to amount to much. And the court will compensate investors only to the extent that there is money left to do so.

So D.Z. may be right that money is due investors, but the odds of collecting even a minute portion of those dollars is slim. And it won't be quick.

And that's why ABFS investment notes remain one of the best cases for why investors can't fall in love with the sales pitch and the big ideas without reading the small print and digging into an investment before making a decision.

Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe's Stupid Investment of the Week or a comment about this week's column, you can reach him at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.