Is Favorite Web Site Best Investment

Every Tuesday

Some rules have been around as long as there have been mothers: Eat your vegetables. Don’t hit your sister. Floss.

The investment world has similar maxims: Buy and hold. Don’t try to time the market. Buy what you know.

Sensible rules. But when it comes to Internet stocks, that last maxim could cost you some serious money.

Mutual fund legend Peter Lynch popularized the “buy what you know” theory of investing a decade ago in his book, One Up On Wall Street: How To Use What You Already Know To Make Money In the Market. Lynch’s success as manager of the Fidelity Magellan mutual fund spurred millions of investors to scour shopping malls and grocery stores for investment inspiration. Long lines at Wal-Mart prompted Lynch-like investors to devour the company’s annual reports.

These days, investors with home computers don’t even have to leave the house for ideas. Rigo Santiago, for example, owns stock in Ameritrade and E-Trade. Santiago, 40, of West Hollywood, Fla., says he was attracted to the on-line brokerages because he has used them to trade stocks.

Likewise, Gwen Hopkins, 45, of Howell, Mich., invested in Amazon.com after buying products from the on-line bookseller. “I feel it’s going to be a tremendous company for years to come,” she says.

That kind of talk unnerves some financial planners. David Yeske, a planner in San Francisco, maintains his firm’s World Wide Web site and uses the Internet to communicate with some of his clients. Because he’s so clearly a fan of technology and the Internet, Yeske says, it’s sometimes difficult for him to convince a client that his or her favorite Internet companies aren’t great investments.

Yeske believes popular e-consumer companies, such as Amazon, eBay and eToys, will have a tough time staying ahead of the competition. Compared with start-up costs at Internet infrastructure companies, it doesn’t cost much to start a retail Web business, Yeske says. But while some companies have established a brand identity with consumers, maintaining that identity requires expensive advertising campaigns, Yeske says. That eats into profits, which may explain why many e-consumer companies don’t have any.

So, if you’re bent on investing in the Internet, you might be much better off investing in infrastructure companies that you’ve never heard of. As the USA TODAY Internet 100 Index (see page 4B) indicates, infrastructure companies fared much better in the recent sell-off than retailers that sell toys, cars and CDs. The average e-infrastructure company is down only 4.9% since June 30, vs. a decline of 26.3% for the average e-retail company.

E-infrastructure companies are like manufacturers of auto components: You can’t see their products, but your car won’t start without them. And because starting an infrastructure company is costly, existing players are less vulnerable to competition. Some even have earnings.

That doesn’t mean e-infrastructure stocks are cheap. While they don’t have the mass appeal of e-consumer companies, infrastructure stocks have benefited tremendously from Internet mania. On Friday, for instance, Copper Mountain Networks, which makes high-speed networking equipment, rose 28%. Since it went public in May, the company’s stock is up 58%.

A safer way to bet on these stocks is to look for a diversified mutual fund with a smart manager and a sprinkling of e-infrastructure stocks. Christine Benz, an analyst for fundtracker Morningstar, says Janus Global Technology, T. Rowe Price Science and Technology and Northern Technology (see chart) all own e-infrastructure stocks but leaven their portfolios with other, less-volatile tech stocks.

If you chose to delve into the e-infrastructure arena, either through individual stocks or mutual funds, do your research. Peter Lynch never told investors to buy stock in a company based on what they saw at the mall. That’s just the starting point. He said you also need to study a company’s balance sheet, read its annual report, and find out what its competitors are doing.

That rule still holds, whether you’re investing in semiconductors or laundry detergent. Buying stocks or funds without researching them first is like running with scissors. And you know what Mom has to say about that.

Your Money appears Tuesdays and Fridays.