At least the radio execs believe. Cumulus was one of three companies in this terrible industry to take advantage of the declines in its stocks and go private. By the way, I think the execs are gravely mistaken about what will occur, but at least they won’t hurt anyone but themselves this time around.
14. You are not an index fund. You don’t “need” any one kind of stock in your portfolio. When I started running my own money, I was gripped by a fever: I was underweighted in tech. How can you not own some tech? I thought.
“Underweighted” is genuine Wall Street gibberish for not owning many stocks in a sector that is big in the S&P 500. Tech is a huge part of the S&P 500, and I owned nothing in it when I started AAPlus, because I though tech was dangerous. Didn’t matter: I felt the need to own something simply because I didn’t want my holdings to be too different from the S&P 500.
What a mistake! I bought EMC at $14 in the spring of 2004. I compounded the error by buying tech at the worst time on the calendar, which is right when the traditional summer slowdown occurs. If you insist on buying tech, wait until July or August, when tech has bottomed in fifteen of the past sixteen years. I felt satisfied that I had the representation I needed to show, and I no longer felt naked.
What did EMC do? Like the rest of tech, it collapsed. My judgment was right. At the very moment I was buying tech, the group became unfashionable in the great fashion show that is Wall Street. EMC plummeted to $10 as tech fell viciously out of favor. I had to punt it. The stock didn’t come back for a long time and only recently has it moved above where I purchased it. I had violated one of the great tenets of individual investing: you don’t need to mimic the S&P 500. You can own what you want, when you want, and you do not need to be constrained by the artificial nature of trying to pick the best stocks in sectors in the S&P 500. Doing that will lead you to buy stocks in sectors you don’t believe in, and, given that 50 percent of a stock’s performance is the sector, doing so is contrary to generating healthier returns than the benchmarks over time. Still, it’s so easy to get sucked in, because all you ever hear in the media is professionals speaking of “underweighting” and “overweighting.” It simply is irrelevant to you at home. No one is watching; no one is critiquing except yourself. Remember, there are plenty of good sectors to diversify into, so you don’t need to be in the bad ones.
15. Be suspicious of high dividends—they often don’t get paid. Two years ago, while reading the always valuable Investor’s Business Daily, I repeatedly saw the chart of Fording Canadian Coal Trust on the list of winning stocks. Everyone knows I like winning stocks, and this one just called for more work because it yielded 14 percent. I like income-producing stocks because unlike bonds, which also produce a steady return, stocks with dividends can produce capital gains too. Oil was going up endlessly and with the United States having an abundance of coal, a little research showed me that Fording had clean coal that would not rankle the environmentalists. I figured I had a good one.
I didn’t. One month after I bought it, the company announced a production shortfall that forced it to cut its dividend, and the stock plunged 6 points. Given that the company didn’t even try to explain away the shortfall or project when the problems would be fixed, I quickly booted the stock. That damage control kept me from losing another 6 points as the problem only grew worse.
But I learned a valuable lesson: outsize dividends, dividends that are much larger than what other kinds of stocks are offering, are red flags. They are often a sign of worry, not a sign of safety. This Fording Coal experience kept me from buying what looked to be some terrific buys in the spring and summer of 2007, when many of the mortgage-related real estate investment trusts were yielding dividends in the low teens. This lesson saved me hundreds of thousands of dollars as even the stocks with the highest coverage of dividends, companies like American Home Mortgage, not only discontinued their dividends but discontinued their business altogether. Many people were attracted to these companies, particularly because managements continued to say that the dividends were safe right up to the last minute, when they were sliced or eliminated.
Remember: there is no free lunch with dividends. Could I have spotted that these dividends were in trouble? Not really, as the companies seemed to be making a lot of money. Sometimes, though, you have to take the market’s cue: I don’t want you buying stocks with ultra high dividends; I want you to sell them. Occassionally, a company can snap back. But we play the odds here and the odds say that a gigantic dividend isn’t a sign of confidence or health, it is a sign of trouble.
16. Pay attention to local papers—the Web is your secret weapon. When I first started trading, I used to read the local papers in the towns where my companies were headquartered. They came three days late. Three days! So it was of limited value to read the Peoria paper to find out how Caterpillar was doing in its efforts to crush the union and bring costs down.
But that was nothing compared to what you can do now to find out about stocks you own. You can load them into Google and find stories about them and their sectors, which is how I was lucky enough to limit my losses with Lamar Advertising early in 2007. The story is a simple one: billboards are important venues for advertisers now that TiVo has made it easy to skip commercials and XM and Sirius have cut into commercial radio. You can’t stop looking at billboards, but that ended up being the problem. Lamar has billboards all over the country, and with a new technique, liquid crystal displays, they were able to rotate the advertisers who rented the billboards, putting three different advertisers on each billboard.
The result? A windfall. Once the fixed cost of the lighting was in, Lamar could charge three times the price for the advertisements. It seemed like found money to me as Lamar rolled out one sign after another around the country. What I didn’t realize, though, when I purchased the stock in the high $60s, was that the signs were too effective. They were causing car crashes. I would not have picked this up had I not done repeated searches for billboard stories to stay current about the industry. (Clear Channel and CBS were doing the same thing; they are the other two in the big three of billboard advertising.) Sure enough, in Providence, Rhode Island, highway safety officials were making noise about these billboards being a dangerous roadside hazard. I was able, quickly, to leave the position at a small loss.
Subsequently, the stock dropped $15 as the Providence concerns went statewide and then became a national problem. The LCD rollout got crimped and the stock got crushed. While there are limits to what you can search even on the Web, let Lamar remind you that things can go wrong with major innovations and changes, but you can follow them and be ahead of the curve. The analysts who followed Lamar stayed bullish until the problems with these billboards surfaced nationally. Then it was too late.
17. Be suspicious of technical analysis. It tends to miss all of the big turning points. I have always had a use for technical analysis because others who run money do, and they can make decisions based on it. Technical analysis tends to divine future prices from how patterns in stock movements form. Typically, you can see tops from something that looks like a head and shoulders on a stock chart, and you can see bottoms when you get what looks like a reverse head and shoulders. I critiqued this analysis in Real Money and gave you examples of where I had been driven out of stocks by technical analysis right before takeovers.
I am going back over this kind of analysis to tell you that the major brokerages now make a big deal of offering technical analysis on all of their free sites as if it were value added. It is extremely seductive and feels scientific, even as investing is inherently psychological and doesn’t lend itself to such hard and fast methods. Good stock-picking, or call it good investing, is much more an art than a science, and the certainty of these research tools can be misleading at best and outright dangerous at worst. Nevertheless, at times I attempted to pick stocks and follow them using this software because it is what many home gamers use. Also, part of the exercise of trying to run the charitable trust was to mo
ve away from the professional style I was used to and examine what you might be looking at instead of the fundamental research I prefer.
I point this out because at two crucial moments, when I was desperate to find bottoms in two stocks, Bristol-Myers Squib and Ingersoll Rand, I looked up what the charts said. The charts were miserable. In these two cases the lines indicated that the stocks, BMY at $22 and IR at $37—well down from where I first purchased them—would not bottom for at least another 4 points.
While I don’t like to trade for my charitable account, I figured, why not sidestep the expected losses? I could sell now, then buy the stocks at the lower price that I expected to come. Sure enough, the stocks never got to those targets—targets, by the way, that independent charting services I looked into verified. Now here’s the rub: because they never got to those targets, I had no ability to get back into them, which is what I’d intended to do. I just kept waiting and waiting for the targets to get hit. Meanwhile both stocks had bottomed and started sustained runs upward. Not only did technical analysis get me out at the wrong time, but it never got me back in. All my homework and assumptions were lost. Keep that in mind when you lap up the free research that the brokers provide. You get what you pay for.
18. Companies can change their stripes, especially when you least expect it. So often we regard companies as static victims of the vicissitudes of their business. We figure they say to themselves, “You know what? We are going to take a beating, no doubt about it. That’s just the work we are in.” It’s one thing for a homebuilder to say this, or even a bank, although some banks have been able to augment their lines of business with some excellent fee income. But it is a whole other thing to believe that companies with diverse lines of business have to take the pain. If Textron sees that its commercial aircraft business is hurting, it can always jettison it. If Procter & Gamble feels that its gross margins are being killed by some boring old brands, it can sell them. And most important, when a good solid American manufacturer is being weighed down by a line of business, it can change its stripes overnight by selling the division.
That’s what happened after I sold Ingersoll Rand in 2006 after the stock took a true beating. As I just mentioned, I rode the stock down and got out at the bottom in part because of technical analysis. However, the story of the turnaround is eye-opening. The company, which has some excellent divisions involving transportation, biometric security, and refrigeration, was being weighed down by its most visible division: Bobcat. Homebuilders employ Bobcats to grade property. They are integral to the housing construction business. Because they are so integral to the process of homebuilding, the analysts who follow the company couldn’t envision any way IR could separate itself from the housing slump. They simply took it as gospel that IR was a housing company. They didn’t listen to management, which was saying that it would do whatever was necessary to reward patient shareholders. The analysts kept downgrading and denigrating the stock as a helpless doe in the lights of the eighteen-wheeler that was the housing slowdown.
One day the company announced that the Bobcat division was for sale. The analysts were in total disbelief. But they recovered from their momentary vision of possible scenarios that could go right and settled on the notion that nobody would buy Bobcat for much, given the housing recession. So wrong! A Korean company with a long-term view stepped up and paid about a billion and a half more dollars than even the optimists thought IR would get. Next thing you know, the stock had jumped 16 points from the $38 price where I had sold it. I had succumbed to analyst negativity. IR was now a home-free play on global transport and security worthy of a much higher price-to-earnings multiple because of the more consistent earnings growth that could now be predicted without the Bobcat division. IR’s management quickly put the proceeds to work, buying back stock to make it one of the better performing stocks during the mortgage-related slowdown. It was a total home run for those who believed, and there was no reason not to believe unless you listened to the negative analysts who followed the company.
Coincidentally, not everyone got this wrong: Warren Buffett accumulated a gigantic position in IR when the company signaled its willingness to make brutal changes to improve profitability. Never underestimate management’s abilities to take control of its own destiny.
19. It just can’t be this bad, can it? The curious case of Yahoo. Not long ago, I was the guest commentator in the postgame show after the Jacksonville Jaguars handed my beloved Philadelphia Eagles a brutal loss at home. I was particularly critical of the Eagles’ defense in my postgame analysis. Some of the players must have been listening to this professional stock picker’s amateur football digression, because when a reporter stuck a mike in front of Sean Considine, a member of the Eagles’ riddled defensive backfield, he fired back that he may not have played well, but that Cramer had burned him worse with his stupid Yahoo pick.
The charge was true to the mark: I had owned Yahoo for a couple of years for ActionAlertsPlus.com. Originally bought in the high $30s, I had averaged down to the point that I had a decent $28 basis. But anyone who had listened to me earlier and not later would have definitely felt like Considine and been eager to clothesline me.
I was still on the air and had a split second to answer, so I simply blurted that I couldn’t believe that Yahoo could be that bad. I had inadvertently hit on another lesson of what it means to publicly manage private money: things can be this bad. I can’t tell you how many times in the past five years I have picked the stocks of companies in industries that were rocking, thinking that, despite a stumble or two, the company was in such great shape, it had such a good business, that it simply could not screw it up.
The experience I had with Yahoo forever puts the lie to that kind of thinking. But you have to understand first how I could arrive at what turned out to be a bogus and costly decision. As a founder of TheStreet.com I was aware firsthand of how powerful and successful Yahoo was. When we started, a mention of our site on Yahoo caused traffic to spike and we depended mightily on Yahoo to gain readership. Over the years Yahoo became less and less a factor for us, in part because we had more people coming from various places on the Web, but also because Yahoo had become less relevant. Throughout this period, though, and to this day, Yahoo has the most traffic of any site on the Web. When you have the most traffic, the most viewers, of a business where advertisers are desperate for space to advertise in and want robust searching to turn up their sites, you should be in the catbird seat. To be sure, Google did come along and take lots of search revenue, in particular because Yahoo was late with its search product. But I figured it didn’t matter; Yahoo would right itself and the stock would advance higher. Yet, over the past two years, no company I follow has been as haphazard as this one in attempting to meet estimates the Street sets for it. It has missed more quarterly projections than any company I have ever seen. It has changed managements, booted people, brought in new people, and the results are always the same: disappointing.
Finally, when the stock ran up on a takeover rumor I was able to dump it for a small loss. It then slid down another 25 percent almost immediately. The whole time this sickening slide was occurring, I consoled myself with the simple alibi that it just couldn’t be this bad; no company could mismanage such a golden goose with such a stunning lack of dexterity and such helplessness.
The moral here is that you can never fall back on something as ephemeral as “It just can’t be this bad” even when you own what had been the best of the breed, that is, the best in its sector. Yahoo owned the Net, but its own terrible management made the stock uninvestable. When you say, “It just can’t be this bad, can it?” think of my Yahoo experience and answer, “Yes, it can.”
20. Don’t let the media panic you out of a good holding. The media is not your friend when it comes to stocks, particularly the stocks of health care companies. It is fitting to examine this lesson at length, because no other lesson has spooked me out of more money than this one. In part this is because, as par
t of my job, I am such a close observer of programming, particularly when it comes to stocks I own. The media isolates the most negative story about medical issues and plays it in your face over and over until you can’t take it anymore. When I say I can’t take it anymore, focus: I am a seasoned pain-taker and if I can’t take it, you can’t either. Let me give you a couple of examples so perhaps you can develop thicker skin than I have and we can go forward knowing that there’s more to every story than the media provides.
In 2006, I noticed that Bausch & Lomb had fallen a quick 10 points from a high. I always liked Bausch & Lomb as a gold-standard play on eye care and was devoted to many of its products for my eyes. It has a hammerlock on products worldwide for surgical eye care, such as for cataracts, and consumer eye care, such as contact lenses and solutions. It has been number one in these categories for years. So I took advantage of the decline and bought some stock in the mid-$60s. Sure enough, not long after, I found out what was ailing the stock: reports that its lens solution with MoistureLoc, a small part of its product line, was causing eye problems that could lead to blindness in a small number of patients. The media was quickly all over it and the analysts panicked, many taking it to a sell. I was beside myself with fear. How many people would get this eye disease? Where was it coming from? Would B&L get in front of it? We had almost no information on it, yet every time there was a new case of the disease, it was on the news. The stock sank right through the $50s to the $40s. When it got to the $40s the company recalled its products from the stores, gave out coupons, and assured people that the situation was under control. But then the media focused on some additional cases, no doubt caused from the same lots, and the company couldn’t put its finger on which plants were making the contaminated solutions.
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