In today's market it seems every stock is a bad stock. Doesn't matter what you buy. It goes down. But I'm not talking about good stocks caught in a bad market. This is about bad stocks with no earnings and no real prospects, the ones with great stories but nothing else. Lots of promise, but no profits.
There are lots of bad stocks, many more than good ones. Any prudent investor should avoid them. But most of us don't. There's always a story that seems so compelling, so right, so possible, that many of us buy a bad stock even though it has no earnings, or racked up huge losses. It's only human to hope for the best even when the facts tell you the odds are against success.
There must be something in the Treasury, Federal Reserve, Senate, and Congressional water bottles that's causing brain damage.
While the initial idea of saving the banking industry to avoid a crisis of confidence made sense because capitalism depends on trust in the banking world, there's a new fever going around that's much more dangerous.
Prices on most stocks are stunningly low, absolutely and relatively. Stocks that sold in the $200 range only a few months ago are now in the $70s (see Potash Corp. (NYSE: POT) ... on June 18, it was $237 ... at this writing, it's trading at $79). Another one: Ambac Financial (NYSE: ABK) It hit $91.60 in February of 2007. Now you can buy all you want for $2.50 or less. There are many more. So which ones are bargains and which ones are anathema? Here's a way to sort through the sale bin.
If you've mustered the courage to buy stocks now, you'll most likely be rewarded very well, if you pick wisely and can stand the volatility for the next several months. One of the keys to choosing a great stock is to look at earnings over the last five years. If you find a company that increased earnings every year, even in these difficult economic conditions, chances are it will do even better when the economy revives.
TARP is the new program for buying mortgages and other assets from financial institutions like banks and thrifts. It stands for Troubled Asset Relief Program. It's also called the "bailout" program. Many people are confused about what this really does and fear that it's a boon for inept management, that it will lead to more outrageous management pay and/or huge taxpayer losses.
Far from it. Here are the details and why it's a well devised answer to current problems and how it can make good profits for taxpayers. Yes, good profits.
There are two parts to the TARP plan: the senior preferred stock that banks sell to the government for capital and the selling of troubled assets to the government.
We're all beaten to pulps with no nerve endings left. Losses are enormous, much more than ever imagined. If we owned Lehman Brothers or Washington Mutual or Fannie Mae or Freddie Mac, we are stunned beyond comprehension.
Get over it. There are so many great opportunities in the market that if you stay in a catatonic stage, you'll miss some of the best buys ever. Yes, even with the recent historic rally.
No one knows what will happen as we stumble through the worst economic mess since the Depression. Yes, it's that bad. We're in a financial maelstrom that is setting new records, bad ones, like 800 points down in one day before rallying back a little to the relief of no one. How will all of this play out? What will be left on the economic landscape? Here's how I see it.
The stock market will eventually stop dropping. Profound I know, but it's a start. What will be unusual is that there won't be a large bounce once the bottom is found. That's because fear and greed drive the market, and fear is so overwhelmingly in control now that greed will have a hard time taking back the wheel of the economic car. As the old saying goes: when fear comes in the room, reason goes out the window. Fear is in the room. Don't expect it to leave any time soon.
The bill to buy assets from banks and other institutions, just passed by the House and the Senate, is not a bailout for them. Now we can look forward to some liquidity flowing into the markets. And here are the benefits of the bill:
First, it doesn't simply throw money at a huge problem, and it certainly doesn't buy pools of mortgages or securities at values that are above market, at least it's not supposed to. What it does do is give the Treasury the authority, limited at first, to buy certain types of securities with stipulations attached. The first one is that the assets are purchased by negotiation and at prices determined by the buyer, not the seller. If the government uses the best minds from the mortgage markets, especially in the fixed income and mortgage-backed securities fields, there will be professional valuations done on each purchase.
Everything is changing. Much of what used to be is gone. Wall Street firms are no more, morphed into banks or simply disappeared. It feels like the end of an era. And so it is.
Change always creates anxiety. Investors are dealing with more change than usual these days. And questions. There are so many questions with no answers that stress levels are reaching new heights. What about the government bailout? Will it work? What about all the bad mortgages? How many are there? Will they all default? Are stocks still a good investment? Are all investments bad? Does money belong in a strong box under the house where at least it's accessible? Will I keep my job, my house? Will the banking system fail?
What really happened to these venerable names of Wall Street? They were once so powerful, so unbelievably powerful. How could they fail? Simple: everyone got greedy.
Gordon Gecko wasn't right. Greed isn't good. It's the one element of investing that will take you down, doesn't matter who or what you are. When greed enters the room, rational decisions go out the window. Greed doesn't color your vision. It blinds. And it blinded the management of these companies.
Every investor would love to own a stock that doesn't have surprises, makes earnings grow every quarter and raises the dividend annually. At least sane investors do. Others go after hope and promises (no profits yet, but coming, we promise) and sleepless nights. This column isn't for them. It's for the ones looking for a stock that doesn't exist.
If there's ever been a final nail put in the coffin of the myth that there's a stock that couldn't possibly fail, it's Fannie Mae and Freddie Mac wielding the hammer. Every respected columnist and pundit wrote glowingly of these two a year ago. How well capitalized they were. How large they were. How they were the engine that made the mortgage market go. And above all else: they had the implied guarantee from the Federal Government behind them AND THAT THEY COULDN'T BE ALLOWED TO FAIL. There was no way they could fail. No way.
Now we know different. They haven't failed, but shareholders have a hard time finding solace in shares selling for 85 cents a share, ones they bought at $35 a share last year. Many people will say: serves them right. They took a risk, and it didn't work out. If these two giants had made money, shareholders would have made money as well. No question. In the stock market, you take a risk for the reward. Sometimes you take it for the loss.
Oil's surge is over. Having reached almost $150 a barrel, it now trades near $100, as of this writing. It may be lower when you read this. That's good news on many fronts. But lower oil prices aren't enough to get this economy back on track. For that, real estate, and in particular home sales, and employment need to rebound in a meaningful way. Here's why.
Let's first look at oil. It's used for many different products, from gasoline to lubricants to tires, etc. Lower oil prices will make filling up at the gas station much less painful. That will give consumers a little more money in their wallets every week. It also lowers the cost for manufacturers using petroleum in their products.
Nobody ever said investing is easy. If they did, they've never done it. It's emotionally draining, intellectually challenging, and unbelievably frustrating.
Especially when markets are as volatile as they are today. It's not just the stock market. Commodities like corn, gold, and oil spike one day only to fall the next. Bond prices run up, then get knocked back. Stocks, most noticeably when reflected by the Dow Jones Industrial Average (which only has 30 issues in it), soar 300 points one day, then crash 350 the next. There are no safe havens. No sector is exempt.
You may see a recommendation to "overweight" a stock or sector. An analyst is bullish on a stock or group and feels buying more than usual will be rewarded. It may or may not come true. While it's a good idea to overweight at times, it should never be done in excess, to a point where you're putting too much of your portfolio in one stock or group of stocks. That's when overweight turns into speculate.
A rational approach to building a portfolio is to have at least five different sectors, ones that aren't correlated. There are different definitions of sectors but there are usually between 10 and 15, depending on what publication or expert you use. These sectors are categorized into broad groups, such as Healthcare, Technology, Manufacturing, etc. Within each sector are many industries. Value Line defines 98 different industries, ranging from Coal to Auto Parts to Water Utility to Beverages. Healthcare, as one example of a sector, has pharmaceutical companies, hospitals, medical devices, anything associated with health. Technology has a broad spectrum as well, encompassing everything from computers to wireless communication.
One outstanding opportunity in a stock market hammered as hard as this one is that great stocks are on sale. Many of the best known, best-earning companies are trading at valuations not seen in decades. That's the good news.
The bad news is that many stocks most of us own are way down, trading at levels well below where we bought them. In order to buy anything else, we have to sell what we have for a loss. Most of us can't do that, can't stand the pain. Get over it. Sell some of your worst losers and buy some of the great names.
I can hear many of you now: But Ted, you don't understand. I bought this stock at $10 a share and now it's trading at $1. I'd lose 90% of my money. I do understand. I've done it. Several times. That biotech I was sure was going to cure (pick one): cancer, malaria, the common cold, bursitis, arthritis, dandruff, ear wax, split ends, etc. Somehow they never came through except in their need for more money. They were always so close. Management just needed a little more time and a lot more money.
Preferred stocks are much like squirrels. They don't live on the ground. They don't fly in the air. They're always somewhere in between. A preferred is like that. It's not equity in a company. It's not debt of a company. It's always somewhere in between.
That state of being, being in between, sometimes pays handsomely to investors. Other times, it leaves them totally isolated, with nothing to show for their investments. Here's how preferred stocks work, and why they're really for institutions, not individuals. Still, individuals may find them irresistible when they see some of the yields these hybrids offer.
Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth and Sleep Well at Night. In this weekly column, he'll offer advice to investors who are just getting started.
Ted Allrich is the founder of 
Ted Allrich is the founder of 
Ted Allrich is the founder of 
Ted Allrich is the founder of 
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