(FORTUNE Magazine) – This economy has been rough on investors. But at least they can take comfort in the fact that Jeff Bezos isn't faring any better. Amazon held huge stakes in now defunct businesses like Webvan, Kozmo.com, and Pets.com. In fact, Amazon's disastrous portfolio has cost the company $71 million in losses and write-downs in the past three quarters.

Amazon isn't alone. This earnings season a cavalcade of companies have announced staggering declines in the value of their outside investments. The Washington Post Co., for example, wrote down $26 million. Compaq lopped off $514 million. And Microsoft announced a $1.2 billion write-down, on top of a $3.9 billion write-down last quarter. The list goes on.

All of which raises the question: Why do public companies amass such large investment portfolios in the first place? In principle, there's nothing wrong with this practice. When we buy stock, we're trusting a company to invest our money wisely, says Andrew Metrick, a finance professor at the University of Pennsylvania's Wharton School. It shouldn't matter, he says, whether a manager buys a physical asset--like a factory--or the stock of one of her suppliers that she knows from experience is being undervalued by the market. The point is for the manager to deploy cash where she knows she will generate the best return for the business.

The problem comes when managers stray outside their areas of expertise. "Strategic investments in joint ventures or related companies--those make sense," says S.P. Kothari, an accounting professor at MIT's Sloan School of Management. "But management shouldn't try to study the stock market for attractive opportunities. That is not the competitive advantage of these management teams. That is the job of a mutual fund manager or the shareholders themselves."

But during the long bull market--when companies had huge piles of cash lying around--corporate executives got greedy. Big investment portfolios loaded with tech stocks looked like an easy way to boost earnings. Internet companies like Amazon were perhaps the most susceptible to this phenomenon. But traditional companies were hardly immune. General Electric added Net stocks such as iVillage, Internet Capital Group, and Promotions.com, many of which have lost more than 90% of their value, to its investment portfolio. Microsoft bought big in cable and telecom stocks--and is paying for it now.

Companies need to keep some extra cash on hand, of course, so they can seize legitimate business opportunities. But Kothari says that cash should be kept in low-risk, low-return investments, such as Treasury bills or money market accounts. Money that management can't foresee reinvesting into the core business ought to be returned to shareholders as dividends or used to increase shareholder value through stock buybacks.

Of course, there are some examples of companies whose outside investments have worked. SunTrust Banks still owns 5.8% of Coca-Cola, an acquisition it made way back in 1919 and has profited from handsomely over the years. Then there's Berkshire Hathaway, with its successful holdings in companies such as Coke, Gillette, and Washington Post.

But Berkshire is the exception that proves the rule. "When you give a dollar to Warren Buffett, you know exactly what he is going to do with it," says Wharton professor Metrick. For most managers, the best advice is, Don't pretend you're Buffett. Stick to what you know, or give us back our cash.

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