How I lost 98.5% in an individual stock

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SoonerSunDevil
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How I lost 98.5% in an individual stock

Post by SoonerSunDevil » Mon Mar 10, 2008 12:58 pm

A couple of years ago, during my second to last semester of college, I was fortunate enough to take part in a class at the University of Oklahoma called the "Student Investment Fund." The fund was started in 1998 with a $100,000 gift from OU alum Michael F. Price. Today, the fund is worth almost $400,000. Many Bogleheads will recognize the Price name, but for those that don't here's a link:

http://price.ou.edu/about/mfp.aspx

While in this class, I was assigned to the "Banking and Finance" group. Our mission was to find stocks that were undervalued using a margin of safety technique similar to the one used by Benjamin Graham, later used by Warren Buffett, and today is used by Michael F. Price. Price has spoken at OU several times, specifically to the SIF class, and he was kind enough to put together a mini lecture series of his thoughts regarding individual security analysis. We watched these videos, took extensive notes, studied previous analyses, and then we were on our way.

My group was made up of four bright guys. One took a job with a mid-sized mortgage company, the other now works for a leading consulting company, the other is in law school at Northwestern, and I'll be in law school this August. The point is that we were all sharp guys, all convinced that we could find an undervalued stock, and even more convinced that if we did the analysis right that nothing could stop us.

In the spring of 2006, we decided to purchase shares of Fremont General Corp., ticker FMT. We purchased the shares just above $20 a share, and were convinced that the stock was at least worth $35-$38 a share. Here's a chart of FMT as of this afternoon.

http://finance.yahoo.com/echarts?s=FMT# ... =undefined

Yes, FMT is now trading at 32 CENTS a share! That's a loss of almost 98.5 percent!!! The good news is that we only purchased $15,000 of FMT, but the bad news is that our current position in FMT would be $0 after commissions are factored into the equation!

In the interest of full disclosure, I must admit that I am currently thinking about buying some Washington Mutual (WM) and/or Citigroup (C). I haven't bought an individual stock in four years, but if I do decide to purchase WM or C, I'll let the forum know so others can short the stock. :)
Last edited by SoonerSunDevil on Mon Mar 10, 2008 5:20 pm, edited 1 time in total.

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Taylor Larimore
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Some never learn. :-)

Post by Taylor Larimore » Mon Mar 10, 2008 1:30 pm

Hi Boomer:

Yes, FMT is now trading at 32 CENTS a share! That's a loss of almost 98.5 percent!!! -- In the interest of full disclosure, I must admit that I am currently thinking about buying some Washington Mutual (WM) and/or Citigroup (C).


Some of us never learn. :(

Best wishes.
Taylor

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Post by financialguy » Mon Mar 10, 2008 1:37 pm

Great post! I am currently having a similar learning experience in my Investments class, though fortunately not with real money. We're doing a stock-picking contest which started at the beginning of January. Everyone else is doing rapid-fire buying and selling of individual stocks, buying options, etc. Unlike everyone else, in my practice account I bought the VG Total Stock Market ETF and just let ride.

Guess who's #1 in the rankings. 8)

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Post by Kenster1 » Mon Mar 10, 2008 1:39 pm

"An investment in knowledge pays the best interest."

~Benjamin Franklin~
SURGEON GENERAL'S WARNING: Any overconfidence in your ability, willingness and need to take risk may be hazardous to your health.

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Post by MP173 » Mon Mar 10, 2008 8:32 pm

Sooner:

I got you beat...rode one down to 100% loss, plus commission!
I did get a little tax benefit out of it. Learned my lesson.
ed

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Post by mptfan » Mon Mar 10, 2008 9:18 pm

financialguy wrote:Great post! I am currently having a similar learning experience in my Investments class, though fortunately not with real money. We're doing a stock-picking contest which started at the beginning of January. Everyone else is doing rapid-fire buying and selling of individual stocks, buying options, etc. Unlike everyone else, in my practice account I bought the VG Total Stock Market ETF and just let ride.

Guess who's #1 in the rankings. 8)
That's hilarious! What has been the reaction?

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Post by mlebuf » Mon Mar 10, 2008 10:29 pm

Great post, John. When it comes to stock picking and sports betting, we are all geniuses until the final results are in. :D

Welcome to the real world, where everyone's crystal ball is very cloudy at best.

Best wishes,
Michael
Best wishes, | Michael | | Invest your time actively and your money passively.

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Re: Some never learn. :-)

Post by jmFightSpam » Mon Mar 10, 2008 11:10 pm

Taylor Larimore wrote:Hi Boomer:

Yes, FMT is now trading at 32 CENTS a share! That's a loss of almost 98.5 percent!!! -- In the interest of full disclosure, I must admit that I am currently thinking about buying some Washington Mutual (WM) and/or Citigroup (C).


Some of us never learn. :(

Best wishes.
Taylor
Hi Taylor, I am assuming you mean some of us never learn with respect to buying an individual stock. I am a Boglehead in training so to speak and I am totally inline with index investing as well as a balanced asset allocation.

However, I will say, if you really, truly believe in a company from the bottom of your heart and want to be a part of that compnay, then buying the company's stock is ok in my opinion. In fact, I would say that is the idealist's notion of what the stock market should be about -- people buying companies because they believe in them and their product.

Now I am not saying the original OP is thinking of buying WM or C because he really believes in the companies, but if he does, I see nothing wrong with buying them. There is a big difference between day trading, speculating -- and -- wanting ownership of something that you feel strongly about.

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Invest in what you know -- like video games

Post by Idahusker » Mon Mar 10, 2008 11:20 pm

I used my incredible first-hand experience playing video games to purchase 1,000 shares of GT Interactive stock several years ago at $2 per share. I was convinced that a game called "Duke Nukem Forever" would take over the world and make my investment pay off big.

The game was never released, GT Interactive was purchased by Infogrames -- which then renamed itself Atari -- and the stock reverse-split about a zillion times.

My 1,000 shares are now 20 shares worth a total of $33.60 as of today.

Yeah baby!!!!!

I stick to mutual funds now.
:roll:

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Post by tfb » Mon Mar 10, 2008 11:20 pm

Joining the club here. Bought WorldCom. Lost all. Recently got 1% back from class action settlement.
Harry Sit, taking a break from the forums.

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Post by gummy » Tue Mar 11, 2008 12:09 am

Yes, FMT is now trading at 32 CENTS a share! That's a loss of almost 98.5 percent!!!
Hmmm ... that rang a bell:

Image
:lol: :lol:

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Re: How I lost 98.5% in an individual stock

Post by SoonerSunDevil » Tue Mar 11, 2008 8:41 am

OUJohnNasr wrote:In the interest of full disclosure, I must admit that I am currently thinking about buying some Washington Mutual (WM) and/or Citigroup (C). I haven't bought an individual stock in four years, but if I do decide to purchase WM or C, I'll let the forum know so others can short the stock. :)
WM is up 9% right now, and C is up 7%. Damn...

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Re: How I lost 98.5% in an individual stock

Post by Valuethinker » Tue Mar 11, 2008 10:39 am

OUJohnNasr wrote:
OUJohnNasr wrote:In the interest of full disclosure, I must admit that I am currently thinking about buying some Washington Mutual (WM) and/or Citigroup (C). I haven't bought an individual stock in four years, but if I do decide to purchase WM or C, I'll let the forum know so others can short the stock. :)
WM is up 9% right now, and C is up 7%. Damn...
Beware catching the falling knife.

A better bet would be:

- a CEF which invests in high quality MBS and has made limited use of leverage (GNMAs, Fannie Maes etc.) so it cannot be crushed in the margin squeeze. The problem with an open ended fund is you won't get the same gearing, and redemptions could kill it whilst you are waiting for the upside

- an ETF for the US banking sector - reduces your upside, arguably, but also your downside

There is an ETF for US housebuilders, but my sense is that we are nearing apocalypse in this sector, and a major player is going to go broke (Beazer?). Buy when there is blood on the streets... Alternatively find the best capitalised HB you can find (beware off balance sheet associates!) and hold on for dear life.

There are still icebergs out there. Rumour Merrills has paid a hedge fund to take debt off its balance sheet, with a guaranteed right to put it back on Merrills in 12 months time at a fixed rate of interest. They must be truly desparate to effectively 'borrow' from a hedge fund on that basis.

Distressed debt will also get really interesting, although as Wilbur Ross and others have said, it's easy to be too early...

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Post by Frobie » Tue Mar 11, 2008 2:55 pm

You can read all you need to know about my hypothetical stock-picking "prowess" here. I was the original poster in that thread.

Not sure how you'd even find out how much my positions in WorldCom or Compaq would be worth (and I use the term loosely) today.

Eek.
I have learned that success is to be measured not so much by the position that one has reached in life as by the obstacles which he has had to overcome while trying to succeed. --Booker T. Washington

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Post by matt » Tue Mar 11, 2008 4:49 pm

Frobie wrote:
Not sure how you'd even find out how much my positions in WorldCom or Compaq would be worth (and I use the term loosely) today.
Worldcom reorganized into MCI, but the original stock is worthless. Compaq, on the other hand, merged with Hewlett Packard in a stock deal (announced in late 2002, I think). If my memory is worth anything, the price of CPQ when the deal was announced was about $12. HPQ has done quite well since then, so you might not have been in too bad of shape with that one, maybe even a small gain.

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Post by MWCA » Tue Mar 11, 2008 5:54 pm

I have never purchased a stock before. Im so tempted too.

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Post by jmFightSpam » Tue Mar 11, 2008 5:57 pm

MWCA wrote:I have never purchased a stock before. Im so tempted too.
I agree with Taylor and most Bogleheads....don't speculate. Indexing and correct asset allocation in the long run will do you right. However, if you believe in a company, their products, their management, and their fundamentals, then, by all means, in my opinion, buy the stock. But don't go chasing returns; that will burn you 99% of the time.
Last edited by jmFightSpam on Tue Mar 11, 2008 6:00 pm, edited 1 time in total.

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Post by MossySF » Tue Mar 11, 2008 5:59 pm

My company used to be owned by Fremont General back in the late 90s. We bought the corporation from them for $100 so they could take a tax writeoff. The same management idiots who blew up their insurance operation by opening the flood gates on workers compensation without any underwriting (because they thought they were fully covered by a reinsurance pool -- the pool later turned out to have insufficient assets) struck again with subprime loans.

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Post by tdhg566 » Tue Mar 11, 2008 7:21 pm

tfb wrote:Joining the club here. Bought WorldCom. Lost all. Recently got 1% back from class action settlement.
I can beat that. We bought Enron for $0.29 the day AFTER they declared bankruptcy. And since it was the day AFTER bankruptcy, we're EXCLUDED from the recently announced class action settlement. :x The only consolation was that we only lost a few hundred on this very speculative bet. And yes, we learned our lesson and we've never done it again. :lol:
As an Enrolled Agent I advise clients about taxes and investments. My work is retiree friendly, geographically portable, mentally stimulating, personally profitable and emotionally rewarding.

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Post by Ariel » Tue Mar 11, 2008 7:24 pm

tdhg566 wrote:We bought Enron for $0.29 the day AFTER they declared bankruptcy.
I think you must have confused one word for two: "worthless" versus "worth less" :wink:
Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)

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disastrous mistakes

Post by jiclemens » Tue Mar 11, 2008 8:13 pm

I'll bet a lot of us could confess to making disastrous mistakes in our investment careers because it is so easy to rationalize the risk. When I was young (70's and 80's) I had just learned about dollar cost averaging but not about performance chasing and I discovered 44 Wall Street. I rode that one right into the ground. I recovered but still kick myself at times.
:roll:

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Post by retired at 48 » Tue Mar 11, 2008 10:00 pm

Is there an inherent advantage to buying Citibank versus buying the large bank ETF, KBE? I had an initial purchase of a mutual fund decline about 94% once. I didn't average down! Retired at48

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Re: How I lost 98.5% in an individual stock

Post by SoonerSunDevil » Wed Mar 12, 2008 10:27 am

OUJohnNasr wrote:In the interest of full disclosure, I must admit that I am currently thinking about buying some Washington Mutual (WM) and/or Citigroup (C). I haven't bought an individual stock in four years, but if I do decide to purchase WM or C, I'll let the forum know so others can short the stock. :)
C is up almost 14% since Monday's close, and WM is up almost 26% since Monday's close.

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Post by Frobie » Wed Mar 12, 2008 12:46 pm

matt wrote:Frobie wrote:
Not sure how you'd even find out how much my positions in WorldCom or Compaq would be worth (and I use the term loosely) today.
Worldcom reorganized into MCI, but the original stock is worthless. Compaq, on the other hand, merged with Hewlett Packard in a stock deal (announced in late 2002, I think). If my memory is worth anything, the price of CPQ when the deal was announced was about $12. HPQ has done quite well since then, so you might not have been in too bad of shape with that one, maybe even a small gain.
Interesting information, thanks. I guess this makes me a merely bad stock picker rather than a ridiculously horrible one. ;)
I have learned that success is to be measured not so much by the position that one has reached in life as by the obstacles which he has had to overcome while trying to succeed. --Booker T. Washington

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Post by retired at 48 » Mon Mar 17, 2008 3:02 pm

retired at 48 wrote:Is there an inherent advantage to buying Citibank versus buying the large bank ETF, KBE? Retired at48
OUJohnnasr replied: As of his initial post, Citibank up 14%; WM up 26%.

Ret/48: As of today, from initial posting date, C is -8.6% at low today; WM is -13% at low, by my calculations.

I again ask, is there an inherent advantage to buying these indiv. stocks versus the large bank ETF, KBE?

Retired at 48

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Post by DRiP Guy » Mon Mar 17, 2008 3:18 pm

gummy wrote: Hmmm ... that rang a bell:
Always love your humor! Great little poem.

:lol:

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Post by SoonerSunDevil » Mon Mar 17, 2008 3:22 pm

retired at 48 wrote:
retired at 48 wrote:Is there an inherent advantage to buying Citibank versus buying the large bank ETF, KBE? Retired at48
OUJohnnasr replied: As of his initial post, Citibank up 14%; WM up 26%.

Ret/48: As of today, from initial posting date, C is -8.6% at low today; WM is -13% at low, by my calculations.

I again ask, is there an inherent advantage to buying these indiv. stocks versus the large bank ETF, KBE?

Retired at 48
I would have sold before the stocks went down :wink:

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Post by learning » Mon Mar 17, 2008 3:23 pm

Hi OUJohnNasr,


Did your college "Student Investment Fund" program teach investment? Or speculation?

What goal was the class trying to fund? Over what time period? With what risk tolerance?

I don't mean this to sound like a rant (perhaps it is), but there are so many programs in the schools now -- there's even one in our town's local high school -- that claim to teach investment. But then have students sit around trying to pick stocks. Bragging about the "winners". Swapping war stories about the losers.

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I only lost 91.5%

Post by hollowcave2 » Mon Mar 17, 2008 7:33 pm

thanks for the story.

I only lost 91.5% of my investment (a small stake, admittedly, but still painful) in Bear Stearns before the first trade even got a chance to clear.

I am cured of individual stock investing. Yeah!!!!!!!!!!!!!!

Steve

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Re: How I lost 98.5% in an individual stock

Post by Sunny Sarkar » Mon Mar 17, 2008 8:56 pm

OUJohnNasr wrote:WM is up 9% right now, and C is up 7%. Damn...
John, That's how the devil gets you :)
"Cost matters". "Stay the course". "Press on, regardless". ― John C. Bogle

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Post by SoonerSunDevil » Mon Mar 17, 2008 9:28 pm

learning wrote:Hi OUJohnNasr,


Did your college "Student Investment Fund" program teach investment? Or speculation?
We were taught investment basics as it pertains to forecasting future cash flows, discounting those cash flows at an appropriate rate, only buying stocks with a margin of safety of at least 30%, and doing a bottom-up analysis of the stocks in question. Michael F. Price was kind enough to "donate" the exact spreadsheet that one of his analysts used to value Sears.

We would compare financial ratios of say, Citigroup, against its' various peers. We would determine how profitable the company was relative to peers, the P/B relative to peers, FCF/share relative to peers, etc.

Additionally, each group was required to present the findings to the class. Various students would ask questions, seek clarification, question the presenting group about possible risks, etc. After the presentation and Q&A was over, the presenting group would go outside while the rest of the class had a debate over the presentation. The students remaining in the classroom would fill out a sheet of paper detailing their reasons for voting yes or no with respect to purchasing the stock. If 75% or more of the class did not vote yes, the stock was not purchased.

learning wrote:What goal was the class trying to fund? Over what time period? With what risk tolerance?
The goal was to find distressed stocks and emulate the value investing methods of Michael Price, Warren Buffet, Ben Graham, etc. The time period was irrelevant. When the semester ended, a new class was given the portfolio and each group of students had to re-evaluate the portfolio. There was no instruction as to the risk tolerance of the fund, although the fund was damn near 50% cash when my class started investing. We tried to limit each position to no less than $10,000 and no more than $20,000. There were a couple of groups that couldn't find stocks that were attractive in their respective industry.
learning wrote:I don't mean this to sound like a rant (perhaps it is), but there are so many programs in the schools now -- there's even one in our town's local high school -- that claim to teach investment. But then have students sit around trying to pick stocks. Bragging about the "winners". Swapping war stories about the losers.
I'm guessing we did a little more work than the local high school kids :) I had a similar experience in middle school. My group of guys decided that we would purchase stock in Playboy. Our teacher (one of the football coaches) asked us why we bought Playboy stock. We told him that we firmly (no pun intended) believed in the product, and felt that the long-term growth prospects of Playboy would continue. We were right; Playboy went up 25% in a few months!

I hope I answered all of your questions,

John

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Re: I only lost 91.5%

Post by SoonerSunDevil » Mon Mar 17, 2008 9:28 pm

hollowcave2 wrote:thanks for the story.

I only lost 91.5% of my investment (a small stake, admittedly, but still painful) in Bear Stearns before the first trade even got a chance to clear.

Steve
At least I lost someone else's money :lol:

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Post by learning » Tue Mar 18, 2008 4:32 pm

[quote="OUJohnNasr"][quote="learning"]Hi OUJohnNasr,

I hope I answered all of your questions,

John[/quote]


Hi John,

You've been very generous with your time. Thank you for your answers --and your good humor.

Your course sounds like an excellent training ground for value fund managers.

I'm curious if you have ever read Charles Ellis "Winning the Loser's Game."

If you haven't, I would think you'd find it interesting.

Best of luck in your studies at law school.

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Post by Schooly D » Tue Mar 18, 2008 5:02 pm

I will also admit to having fallen off the wagon. When I started investing a few years ago i vowed never to purchase individual stocks, only diversified mutual funds or ETFs. But then last summer the financial stocks just seemed *so* undervalued. Any stock that has experienced a sudden 30-40% drop in share price must be a victim of over-correction, right? It has to go back up, especially if the company is debt-free, right?

So I bought--get this--a bond insurer (SCA) at $20. A few weeks later the price was down to $14. I bought some more, seizing the opportunity to lower my average share price before the inevitable rebound back up to $35 where the stock had been as recently as July. Then it fell to $9, and then to $5. I kept buying, kept lowering my average share price. Finally, just before Christmas, having gradually invested a whopping 7% of my assets in SCA, I stopped buying. The stock continued to fall and closed today at $0.72, and may well go out of business altogether.

I'm keeping my fingers crossed for a government bailout of the subprime mortgage market, and I'll stick to mutual funds from now on, at least until the next sure thing comes along :wink:

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Post by dumbmoney » Tue Mar 18, 2008 5:56 pm

Losing 100% is nothing. Let me tell you about the time I shorted a "dot-com"...ouch. Shorted at $5, bought it back at $20. (Then it went to $100, before falling to zero).

There's nothing like a bad short to cure the speculative urges.

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Post by alec » Tue Mar 18, 2008 6:16 pm

I've got one for ya'll.

A coworker of mine is getting his MBA through the U of MD, and taking a class on investments [portfolio theory, etc.]. In the second class, the prof went through an hour presentation on the evidence of people [both professionals and individuals] beating the market. The prof cited studies like Carhart's thesis. The prof also went over findings of behavioral finance people, like Terry Odean.

So, what did 1/2 the class do the next day. Naturally they started an investment club to "pick stocks like Warren Buffet and Bill Miller." That's a quote from the class's message board.

Edited to add: the Prof's response on the message board was "Well, good luck with that. ;-)"

- Alec

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Post by mesaverde » Tue Mar 18, 2008 6:33 pm

There's no way I will speculate even $1 of my hard earned money on the stock of individual companies. It doesn't matter how much I believe in the business practices of the company.

Investing in concentrated sectors such as gold and energy involve a higher degree of risk than investing in the broad stock market. Speculating on individual companies seems downright foolish, regardless of how much you know or think you know. If I want to gamble, I will buy a lottery ticket.

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Post by retired at 48 » Tue Mar 18, 2008 8:10 pm

Schooly D wrote:
So I bought--get this--a bond insurer (SCA) at $20. A few weeks later the price was down to $14. I bought some more, seizing the opportunity to lower my average share price before the inevitable rebound back up to $35 where the stock had been as recently as July. Then it fell to $9, and then to $5. I kept buying, kept lowering my average share price. Finally, just before Christmas, having gradually invested a whopping 7% of my assets in SCA, I stopped buying. The stock continued to fall and closed today at $0.72, and may well go out of business altogether.

I'm keeping my fingers crossed for a government bailout of the subprime mortgage market, and I'll stick to mutual funds from now on, at least until the next sure thing comes along :wink:
To prevent this buying downward from recurring, suggest evaluating a buying technique in posting titled "Retired@48 Pyramiding Upward" by hurleyhuckster, on the Morningstar Orig. Forum.

retired at 48

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Post by SoonerSunDevil » Tue Mar 18, 2008 11:38 pm

The stock that I posted about, Fremont General (FMT), was down 10.0% today. Only a piece of s*** company like that could possibly lose double digits on a day when the Dow is up 400+ points, the S&P 500 is up 4.25%, the Fed cut rates 75 basis points, and even a near bankrupt company like Bear Stearns was up 22+%!!!

Now THAT"S a negative correlation!

Perhaps this is a buying opportunity for FMT? :shock:
Last edited by SoonerSunDevil on Tue Mar 18, 2008 11:47 pm, edited 1 time in total.

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Post by SoonerSunDevil » Tue Mar 18, 2008 11:45 pm

learning wrote: Hi John,

You've been very generous with your time. Thank you for your answers --and your good humor.

Your course sounds like an excellent training ground for value fund managers.

I'm curious if you have ever read Charles Ellis "Winning the Loser's Game."

If you haven't, I would think you'd find it interesting.

Best of luck in your studies at law school.
I have not read Charles Ellis' "Winning the Loser's Game." My reading list is currently occupied with Ayn Rand's "Atlas Shrugged" and after that I am going to read the "60-Minute Estate Planner" although the book is over 300 pages, so I better read fast if I'm going to read it in less than 60 minutes.

If you have any more questions regarding the course I took, I'll be glad to answer them.

Best Wishes,

John

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