Lessons Learned from Broken Stock Picks
By Ron DeLegge, Editor
March 31, 2009
SAN DIEGO (ETFguide.com) – There are many ways to destroy $11 trillion. You can fly over a volcano and dump the money into the mountain’s throat. You can also incinerate the money in garbage dumps of major cities across America. (The government’s "new" old plan to print more money can be added to the list.)
However brash such financial homicide may seem, none of it quite compares to the destructive forces of stock picks gone bad. In this debased regard, our generation has been like few others.
Here’s a short list of destructive and toxic stocks that no investor should soon forget.
Citigroup (NYSE: C)
During its heyday, Citigroup was the sort of stock you could buy, go to sleep and make money. Today, it’s transformed itself into the sort of stock you can buy, go to sleep and lose money. Just ask Prince Alaweed Bin Talal. As he’s learned, banking is a great way to demolish an oil fortune.
One person who’s been happy with Citigroup is former U.S. Treasury Secretary Robert Rubin. Since 1999, he vacuumed in $115 million of compensation for serving in various positions of oversight. Thanks to Bob and his clan of corporate oafs, Citi’s stock is 90% lower than it was at the beginning of 2006. I hope he doesn’t forget to add that to his resume of achievements.
Despite Citi’s horrific performance, maligned investors will be satisfied to know that at the beginning of this year, 12 brave Wall Street analysts still rated the beleaguered Citi a “Buy”, “Hold” or “Strong Buy.” Is this the sort of financial rubbish that passes off as “equity research?”
Bear Stearns (Now part of JP Morgan Chase)
Living in a time period with so many horrific stock recommendations, few will be more memorable than Jim Cramer’s ill-fated Bear Stearns call. On March 11th 2008, after the company’s stock had closed trading at $62.97, CNBC’s main mascot lectured Mad Money’s national television audience that, “Bear Stearns is fine.” Shortly thereafter, the company collapsed and with the U.S. government’s help was eventually salvaged by JP Morgan Chase (NYSE: JPM) for a lowly $10 per share.
CNBC’s handlers later tried to spin Cramer’s Bear Stearns recommendation saying that he was talking about something other than the stock. Not to worry though. JC’s media empire is still firmly in tact. I project he’ll sell 500,000 more books to awestruck novices.
General Motors (NYSE: GM)
Over the past 52-weeks, GM’s stock price has slid 90%. Even after scoring a bridge loan from the U.S. government, the company remains a complete mess. In the October edition of our ETF Profit Strategy Newsletter, I told our subscribers that GM will be the next component of the DJIA to get booted. (I expect that prediction to soon be fulfilled.)
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One of the nefarious lies being perpetrated by media types is that Americans don’t want to own American cars. That’s not true. Who of us wouldn’t want to pilot a ’59 Cadillac or a ’63 Corvette? The main problem is that the dummies in Detroit haven’t made the kind of car we Americans would want to own and drive in about 40 or 50 years.
A dishonorable mention goes to Ford Motors (NYSE: F) whose stock price has been a dead fish in the hot sun.
Tribune Company (Bankrupt)
What do you get when you marry Chicago’s lovable losers (the Cubs) with a real estate billionaire that doesn’t know how to accurately value a media company? Answer: A Tribune Company bankruptcy. And that’s exactly what happened on December 8th, 2008. Anybody caught holding Tribune stock, from clueless individual shareholders to unsurprised employees and to bottom feeding mutual fund managers, got stabbed with a 100 percent loss. Repeat after me: Ouch! (OK, your turn.)
American International Group (NYSE: AIG)
Over the past 16 months, A.I.G. has cratered from around $60 per share to $1.00. Back alley stock hustlers will be pleased to know that A.I.G. is now the world’s largest penny stock. Investing in penny stocks has never enjoyed such heights of legitimacy!
One good thing about the recent nationalization of A.I.G. is that Maurice “Hank” Greenberg can go back to playing checkers. Memo to Hank: For the sake of humanity (and shareholders), you can’t sue A.I.G. and claim you were a victim, when you yourself were A.I.G. As Fred Sanford would say, “You big dummy!”
Thankfully, the Editors at the Wall Street Journal realized that A.I.G. was uninsured and finally gave them the boot as a member of the prestigious Dow Jones Industrial Average (NYSEArca: DIA). As it turns out Kraft Foods (NYSE: KFT) was A.I.G.’s replacement. Put another way: Out with credit default swaps, in with Philadelphia Cream Cheese!
Circuit City (Bankrupt)
On November 10th America’s second largest consumer electronics retail chain short circuited and declared bankruptcy. I guess its 700 or so stores weren’t selling enough tape recorders and USB cables to stay afloat. According to certain mutual fund managers, CC was supposed to be the next Best Buy. But instead of that, it became the Woolworths of electronics.
Mexican billionaire, Ricardo Salinas Pliego now owns a 28% stake in the broken company. Good luck Ricky, you’re gonna need it.
Lehman Brothers (Bankrupt)
What, besides incomplete, would a list of lousy stock picks be without Lehman Brothers? The 158-year old investment firm survived World War I and II along with the Great Depression, but it couldn’t survive the 2008 mortgage and real estate meltdown. Sniff, sniff.
Richard Fuld’s October congressional testimony will rank as one of the worst public performances by any corporate CEO (dead or alive) anywhere. If you missed it, his forehead kept bumping into the microphone. For a fellow that once had a net worth just north of $1 billion, you’d think he knows how to operate a darn microphone. Memo to Dick: Your mouth is supposed to project into the microphone, not your head!
What can we learn from the wreckage of broken stocks? The main message is most certainly not that we need to pick our stocks better, but rather, we shouldn’t be wasting our time with such futile pursuits in the first place. If you’ve become infected with “Data Misinterpretation Deficit” or “DMD”, I’m sure you remain unconvinced. In 2009, I project that you will continue to perfect your mistakes.
For the rest of us, the better course of action is to only invest in individual stocks with risk capital or money we can afford to lose. On the other hand, your serious money, if you have any left, should be indexed to the market. Get your financial priorities in order. After you’ve first laid the foundation of your investment portfolio to a broad mix of low cost index funds and index ETFs – then you can mess around with individual stocks. Not the other way around.
Getting the Right Results
Stock picking is more hazardous to your financial health than you may realize. For that reason, in the February edition of our ETF Profit Strategy newsletter we assembled a list of “50 Blue Chip Stocks and their ETF Replacements.” We matched up stocks with their corresponding ETFs by market size, market orientation, and industry sector.
Isn’t it time you reorganized your portfolio?
REMEMBER: You don’t need to outperform 100% of investors to someday retire comfortably. Winning 80 or 90% of the time should be enough.
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