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

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A "Lockout Rally" is a Sign of Strength

Before jumping in with both feet, one way to confirm that the market has indeed bottomed is to look for additional stocks setting up behind the first wave of emerging leaders. During the first few months of a new bull market you should see multiple waves of stocks emerging into new high ground, during which general market pullbacks will normally be contained to 3% to 5%.

Many inexperienced investors will be looking to buy a pullback, which rarely materializes during the initial leg of a new powerful bull market and from the onset may appear to be overbought.

Typically, the early phase of a move off an important bottom has the characteristics of a “lockout rally.” During this lockout period, investors wait for an opportunity to enter the market on a pullback, but that pullback never comes. Instead, demand is so strong that the market moves steadily higher, ignoring overbought readings. As a result, investors are essentially locked out of the market.


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If the major market indexes ignore an overbought condition after a bear market decline and your list of leaders expands, it should be viewed as a sign of strength. In order to determine if the rally is real, up days should be accompanied by increased volume while down days or pullbacks have lower overall market volume. More importantly, the price action of leading stocks should be studied to determine if there are stocks emerging from sound, buyable bases.

Additional confirmation is when the list of stocks making new 52-week new highs outpaces the 52-week new low list and starts to expand significantly. At this point, you should raise your exposure in accordance with your trading criteria on a stock-by-stock basis. As the adage goes, "It's a market of stocks, not a stock market."

In the early stages of a market-bottom rally it's absolutely critical to focus on leading stocks if your goal is to latch onto big winners. Sometimes you will be early. Stick with a stop-loss discipline, and if the rally is for real, the majority of the leading stocks will hold up well and you will only have to make a few adjustments. However, if you get stopped out repeatedly, you may be too early.

Mark Minervini