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Heed the Market not the “Experts”
November 19, 2013
In 2007, Countrywide Financial was being touted by some of the most successful money managers as a well-run company offering solid value 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 this “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."
In August 1998, I appeared on the Cavuto Business Show on The Fox News Network along with another guest. I was bearish on the market and pointed out the similarities to October 19, 1987, (the day the Dow Jones Industrials dropped 508 points, otherwise known as “Black Monday”).
When Neal asked the other guest, “What are you buying here?” he answered, “We’re buying the stocks that have dropped the most.” This was on Friday, October 28, 1998, and coincidentally, the following Monday, October 31, 1998, the Dow dropped 512 points, suffering one of the worst one-day price declines in stock market history.
I suppose for my fellow guest, the 512 point market crash resulted in even more opportunities to buy stocks that went down the most?
After a sharp decline, some stocks can have short-term bounces or rallies; however, in my experience few stocks bottom out when you expect them to do so. And, even if they do bottom, often they simply move sideways for an extended period, wasting valuable time. There are periods in the market when the reward to aggravation ratio is just not worth your valuable time and capital.
As in any profession, there are only a small number of truly outstanding practitioners, whether a doctor, lawyer, baseball player, poker player or investment pro. Don’t think that just because someone is an “expert” or they’re on TV it means they’re outstanding.
Pros make huge, costly mistakes and often give terrible advice. More importantly, just because some “pro” does something stupid (like buy the stocks that went down the most right into a decline), it doesn’t mean you have to. Be smart. Develop a solid, sensible plan and adhere to it. By doing so, you can outperform most of these so-called “experts.”
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