Heed the Market Not the "Experts"

In 2007, Countrywide Financial was being touted by some of the most successful money managers as a well-run company offering solid value and a good prospect for investment. Some of these managers were buying the stock because it was “cheap” with good management. Down more than 60% from the price it was trading at just seven-months earlier, to some, CFC appeared to be a bargain.

Capital Research and Management Company reported that as of September 30, 2007 its ownership of CFC stood at 47 million shares. Despite that “expert” vote of confidence, the stock still fell from $45 to under $5 in just 12-months.

Even if you hold a "good" company, in a hostile market environment, Wall Street may throw out the proverbial baby with the bath water as the so-called good companies get punished along with the bad ones. An industry-wide problem or a severe bear market can result in even the best investors in the business getting clobbered if they refuse to sell and cut their loss short.


Legg Mason Capital Management (LMCM) was the largest shareholder of Countrywide Financial (CFC), holding about 11.8% of the company’s shares outstanding as of December 31, 2007.

Early in January 2008, CFC announced it had agreed to be acquired by Bank of America (BAC), with CFC shareholders receiving 0.1822 shares of BAC for each share of CFC. CFC shares traded over $40 per share a year earlier. The BAC offer valued them at under $8.

In a portfolio commentary dated February 10, 2008, legendary Bill Miller, Chief Investment Officer, Chairman, and Portfolio Manager of Legg Mason Capital Management, Inc. said: “We were quite surprised by the decision to sell the company at close to a seven-year low in the stock price, and agreeing to a bid that amounts to only 30% of book value and under 3x consensus earnings for 2009… What makes the decision puzzling is that the company was seeing solid deposit growth, has no apparent capital problems, was not forced by the regulators to seek a merger partner, and is in sufficiently sound condition to have declared its regular quarterly dividend at the end of January.”

Nice speech, sounds logical however; it means nothing compared to the verdict of the market. Stocks don’t care about speeches or who gives them.

You will have a much greater chance of success with trading if you learn to listen to the market not the so-called "experts."

WHAT IS A “GOOD” STOCK

So then, what makes for a “good” stock? Safety doesn’t come from holding on to good stocks; none exist. There are only stocks that go up and stocks that go down, and then there are good companies too. You must learn to differentiate between a good company and a good stock.

If you’re an investor, a stock is good when its price rises above where you purchased it. While the company may have good management and a solid balance sheet, this is not an excuse to hold onto your position in the face of a declining stock price that could very well be discounting a future problem that isn’t yet apparent.

Even if there isn’t something wrong with the company, it may just be that the stock price has gotten ahead of its earnings and it simply needs to go through a corrective phase. Unfortunately, even for some of the best companies, these corrections or dormant price periods can last for many years or even decades.

Ex CEO of the failed insurance company AIG referred to his company and said “It’s (AIG) a national treasure.” On September 16, 2008 he commented: “Most of my net worth is in AIG, I never believed this was possible”

On 2/23/2009 AIG’s stock price traded at 0.45 cents and had lost more than 99% of its value.

So then, if Hank Greenberg and Bill Miller didn’t have a heads up to run for the exits, what makes you think you know much better? The stock price knew!

Mark Minervini