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8:30 AM EST Wednesday, September 6, 2006: Today's lesson is don't put your hard-earned money into something you know nothing about. Don't be seduced by glamor. Don't be seduced by buxome stars. Don't be seduced by (alleged) huge profits. This is advice from my heart. I once put $56,000 into a "sure thing" Broadway play. I lost every penny. Or, better put, I paid $56,000 for two seats to opening night, the cast party and a CD of the music.

That said, every reader of this column knows the world of investing faces too much money chasing too few opportunities. This means everyone (including those who are investing your money) are getting desperate. Latest desperation. Hedge funds are moving into movies -- I turned a movie investment down recently because my wife hated the script. And I wondered what do I know about movies? Clearly not much. I can't even remember the name of the last one I saw. What do hedge funds know about movies? Probably as little as I know. BusinessWeek has this marvelous piece called, "Duds in the Water."

As risky movies go, few were more fraught this summer season than the disaster remake Poseidon. It featured no big stars, cost an estimated $160 million to produce, and had to battle the public's nostalgia for the cheesy but successful original. Few industry watchers were particularly surprised when the movie sank like, yes, an overloaded cruise ship.

Good thing Poseidon's maker, Warner Bros. (TWX) got someone else to pay half the upfront costs -- and absorb half the potential losses. An equity fund created by Stark Investments, a $7.5 billion hedge fund based in Milwaukee, has invested about half a billion dollars in six Warner films, including Poseidon and V for Vendetta, another dud. Based on a BusinessWeek analysis, Stark has so far lost $25 million on its Poseidon misadventure, and a little less on V. There is already blood in the water: The hedgie, which declined to comment for this story, has parted ways with the former investment banker who was advising it.

The studios have been using other people's money forever, often from wannabe tycoons with only a tentative grasp of Hollywood's creative dealmaking. But recently the so-called smart money has been flooding into Tinseltown. Over the past two years, private-equity firms have ponied up nearly $5 billion, with everyone from Merrill Lynch & Co. (MER) to Credit Suisse First Boston (CSR) joining the stampede.

The finance pros figured they had moviemaking all figured out. But several megaflops have some Hollywood insiders wondering if the private-equity guys are in way over their heads. "It's tough to be an investor when the studio gets to pick the films and you stand behind them in line to get paid," says leading Hollywood banker John W. Miller of JPMorgan Securities. "It's hard to see how you can get more than single-digit returns -- if you're lucky."

The Wall Streeters arrived in Hollywood armed with sophisticated models that they say will protect them from losses. Essentially they project film profits based on the records of directors, stars, genres, and even distribution dates. "You can never take the risk out of investing in a film," says Ryan Kavanaugh, head of Relativity Media, which has a pretty good record. It raised a $600 million fund with Deutsche Bank (DB) to provide financing for Paramount Pictures (VIA) and Universal Studios films. "But you can mitigate it by choosing those that meet rigorous criteria." And to minimize the downside of any one film that may bomb, private investors often put money into 20 or more flicks.

It's not exactly bulletproof. Ask Legendary Partners. A $500 million fund set up by two Hollywood veterans and backed by ABRY Partners, AIG Direct Investments (AIG), and Banc of America Capital Investors (BAC), Legendary plans to invest in 25 Warner films. It backed Lady in the Water, the animated Ant Bully, and Batman Begins. While a fund spokeswoman says it's too early to judge its performance, the first two films were flops, so Legendary will be lucky to break even on them.

Making a hit movie doesn't guarantee a rich payday, either. Superman Returns falls into that category. Since its June release, the Warner film has grossed a very respectable $337 million-plus worldwide. Yet according to an investment banker who crunched the numbers, Superman will earn a paltry $25 million for Legendary, which teamed up with the Honeywell International pension fund for this deal. That's barely a 7% return over 10 years, or the time it will take for profits to roll in from the box-office take, DVD sales, and TV showings.

Why is it so hard for outsiders to make money in Hollywood? Ballooning budgets and skyrocketing marketing costs don't help. But the studios game the system, too. They insist on distribution fees of 10% to 15% before sharing profits with investors. And backers often have to stand in line with stars and directors, who tend to want a piece of the action. Besides, the studios make investors take the riskiest movies while keeping likely hits for themselves. Credit Suisse First Boston invested $505 million in Walt Disney Co. (DIS) films, but the studio didn't let the firm in on two big summer moneymakers, Pirates of the Caribbean: Dead Man's Chest and the animated smash Cars.

Maybe the private-equity guys should follow Merrill Lynch, which launched one of the first funds with Paramount, but has since switched to financing film directors like Ivan Reitman, where it gets better terms. Or they could talk to Amir J. Malin. The former chief of studio Artisan Entertainment Inc. now co-manages Qualia Capital, which focuses on media and entertainment assets. Malin has turned down several production deals. What's he investing in? Film libraries. With them, the risky creative part is over.

Pump and dump: I receive 20-30 emails a day telling me about "The best stock to own for the next 10 years," "Trading alert," "Short Term PrOfits!," or "This stock will explode." I had a friend in the business of sending pump emails for corporations. He used to get $5,000 plus some penny stock from the company to send out several million emails to unlucky people like you and I. He told me his emails always caused a pop in the stock. A couple of academics looked at the phenomenon a bit closer and the Economist wrote a piece about it:

Penny stocks are being pushed around by spammers. Investors beware

HLV CAPITAL is a company that prides itself on its share-trading expertise. That must have made it particularly galling when the publicly listed company fell victim to a popular trading scam this month that knocked 37% off its share price in a few days. Written with the usual blizzard of capital letters and exclamation marks, spammers issued unsolicited emails telling investors to buy HLV Capital's shares “First Thing” on August 8th. “It's going to explode!”, the headline said. What the tipsters didn't say was that anyone left holding the stock days later would feel as if a grenade had gone off in their hands.

For the hapless company, based in a New York office buzzing with professional traders, there was little to do afterwards except field hundreds of emails from distressed shareholders. But such spamming was not a one-off. A recent study by Rainer Böhme and Thorsten Holz, two computer scientists from Germany's Technical University of Dresden and Mannheim University, respectively, shows the practice is widespread and does have an impact, at least in the short run, on share trading and prices.

The study tracks shares in America's S&P 500, the NASDAQ Composite, the Russell Microcap Index and Pink Sheets, particularly thinly traded ones that tend to be promoted by spammers. Between November 2004 and February 2006, the researchers found 391 different shares that were targeted. The 111 with sufficient historical data tended to fluctuate 13% more after the e-mails went out than other shares on the indices. In the short-term, they said prices tended to rise after a spamming campaign. They did not study long-term effects.

Others have, however, including Joshua Cyr, who runs the website spamstocktracker.com. He has performed an experiment by making “virtual” investments in 1,000 shares after he receives a spam tip. If his investment of more than $69,000 had been real, Mr. Cyr would have lost more than $46,000 in the past 15 months. Mr. Cyr says share prices spike and then drop, sometimes by more than 90%, before companies realize they have been spammed. Sometimes, they have responded by changing their ticker symbols. Penny stocks are considered ideal for spammers because they trade in low volumes, allowing a small amount of investment activity to generate wild swings in value. This gives tipsters the greatest opportunity to make a profit. Generally, they create excitement about a stock that they also invest in, only to sell it after they successfully push up the price. That can set off a wave of selling which eventually depresses the share price.

The Securities and Exchange Commission has issued warnings about the dangers of such fraud. In 2000 it settled a civil fraud suit against 15-year-old Jonathan Lebed, who used the Internet to inflate share prices. He was forced to repay his $272,826 in profit. But the negligible cost of sending mass emails and the anonymity of spammers make it an easy business to start and a hard one to stop.

Favorite headline from yesterday's computer press: "Electronics on Planes: Scarier than Snakes?"

I like YorkPhoto: Upload your digital photos. Push a few buttons. A few days later you get nice prints, photo books, calendars, mugs, flip books, etc. I've tried using color printers, but:
1. They too expensive. The paper and toners will put you into the poor house.
2. They're too slow.
3. They never seem to work perfectly.
There are a million online photo printers, including Shutterfly, Photoworks, Ofoto, Snapfish, WalMart and Winkflash. I like YorkPhoto. They've given me good service. And I'm a creature of habit. Click here.

Tickles my funny bone (though it probably is serious): The Arizona Republic reports today that the founder of Scottsdale's fastest-growing software company has sued his own company and its other directors, alleging they ousted him last year because he is Iranian.

The US Tennis Open is on. Here is the TV schedule -- only it varies, depending on the length of the matches and if it's raining. Today looks sunny. Two nights ago, it moved from USA to CNBC. For today's Schedule of Play, i.e. who's playing, click here.