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Chuck Jaffe
Dec. 31, 2009, 12:03 a.m. EST · Recommend · Post:
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GMAC is the money pit of the auto industry
By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) -- It was the best of times in 2008, and the worst of times in 2009.
That's not how most investors would describe the past two years, but when you write about bad investments, a good year in the market means it's tough to find Wall Street's dogs. It's hard to be a misfortune-teller in a market where everything -- even bad moves -- seems to lead to happy endings.
A year ago, I fought the urge to say "I told you so" when reviewing my year's picks for Stupid Investment of the Week. The 2008 financial-market implosion made my job much easier, bringing unprecedented success in singling out the bad and the ugly. This year, I'm resisting the urge to go to the window ledge as the rising tide of 2009 lifted some of the leakiest boats.
Dow Jones columnist Brett Arends takes a look at the performance of the stock market over the past decade.
Still, it would be disingenuous for me not to recognize the times when my picks -- rather than the investments -- actually deserved the label of "stupid," for which my favorite definition is "lacking normal intelligence and reason."
Stupid Investment of the Week highlights the concerns that make specific securities, plans or products less than ideal for the average consumer. It would be easy to have a perfect record by focusing on low-hanging fruit -- companies near bankruptcy or the worst mutual funds in history -- but that would be intellectually dishonest, since average investors avoid those things on their own.
The true challenge is finding a purported gem of an investment -- something where there's an honest case to be made for buying it -- and determining that it's cubic zirconium.
In most years, if a stock drops 20% to 25% without making any significant gains, I figure I've gotten it right. This year, with the market flying after reaching its low in early March, that's a nearly impossible standard to reach. Instead, the key focus this year has been the ability to sustain gains for the long haul; plenty of securities with bad fundamentals popped to the top when the market took off, but had significant givebacks thereafter.
It's also important to recognize that the "average" investor is crucial to the process. Stock jockeys, day traders and investors with advanced technical timing models or superior knowledge of the business or industry are far from average, although they write the bulk of my hate mail. There's no doubt in my mind that savvy investors can profit from strategies and products that would make the average person crash and burn, but my sole focus is on whether a security or product will scorch the ordinary guy.
To that end, there were some picks that turned out well. Less than a week after my column on Millennium Bank's offshore certificates of deposit, the Securities and Exchange Commission filed an emergency action to stop the sale of what it called "bogus" CDs, claiming Caribbean-based Millennium was a Ponzi scheme that ran for nearly five years and brought in close to $70 million. I would have loved to have said, with certainty, that Millennium was pure rip-off, but there's satisfaction in smelling something fishy and finding out that it stunk for real.
Likewise, my April column on Advanta Investment Notes warned that the issuing company's precarious financial situation could be a problem for investors, despite the fine history the notes had experienced; Advanta's subsequent bankruptcy bore that out.
The Congressional Effects Fund /quotes/comstock/10r!ceffx (CEFFX 9.42, +0.01, +0.11%) was a good pick for the column; its insistence on holding Treasurys when Congress is in session meant horrible results in a big year for stocks; as such it will finish the year at the bottom of the "moderate allocation" fund category.
By comparison, Fidelity Magellan /quotes/comstock/10r!fmagx (FMAGX 64.80, +0.14, +0.22%) and Janus Worldwide /quotes/comstock/10r!jawwx (JAWWX 40.54, +0.07, +0.17%) were funds that rebounded to the top third of their respective peer groups; it's not enough to make me like the funds for the long haul, but it certainly was sufficient to make them show they were not deserving of being called "stupid investments" this year.
In individual stocks, some issues rode the market's lightning only until their true colors surfaced. Red Robin Gourmet Burgers Inc. /quotes/comstock/15*!rrgb/quotes/nls/rrgb (RRGB 18.31, +0.06, +0.33%) gained roughly 20% in the months after I wrote about it, but then lost about one third of its value from there; even with an end-of-the-year bounce-back, the restaurant chain remains below where it was when it was featured in the column.
Likewise, Palm Inc. /quotes/comstock/15*!palm/quotes/nls/palm (PALM 10.23, +0.07, +0.69%) took a nice ride, only to give it all back; it stands about 7% below its price when selected. It's not enough to say the pick was right, but the conditions that made me dislike the stock are all still in place today.
And for the second straight year, my pick of Fannie Mae /quotes/comstock/13*!fnm/quotes/nls/fnm (FNM 1.16, -0.09, -7.20%) was spot on, proving that a stock can ride the tide one year -- it was among the worst financials in 2008 -- and fight the tide the next, as it was a loser again in 2009 while most financials rebounded.
In other cases, the market overpowered my logic, overcoming bad fundamentals, troubling competitive situations and worrisome market conditions. That won't last forever, but investors who missed out on the ride that stocks like SanDisk Corp. /quotes/comstock/15*!sndk/quotes/nls/sndk (SNDK 29.30, +0.77, +2.70%) -- which more than doubled since I wrote about it in early August -- or RedHat Inc. /quotes/comstock/13*!rht/quotes/nls/rht (RHT 31.26, +0.26, +0.84%) (up almost 50% since being featured in July) have reason to be upset with me.
One of the most controversial columns I wrote all year singled out "swine-flu stocks," which I felt were in a media frenzy-driven pop that was destined to end badly. While I figured the upward push would continue for a time, I never expected the gains to last. For several of the stocks, the gains have completely evaporated, but they all gave investors a good long time with a chance to profit.
Stocks like BioCryst Pharmaceuticals /quotes/comstock/15*!bcrx/quotes/nls/bcrx (BCRX 6.44, -0.03, -0.46%) , which moved from almost $4 a share to $12, and which is down to the $6 range today, or Sinovac Biotech /quotes/comstock/15*!sva/quotes/nls/sva (SVA 6.34, -0.11, -1.71%) , which gained more than 300% to peak above $10 per share before falling to the $6 range, or AVI BioPharma /quotes/comstock/15*!avii/quotes/nls/avii (AVII 1.47, -0.04, -2.65%) , which is still double from where I wrote about it, proved this was more than just a headline-fueled burst.
Because I root for individual investors, I don't mind if tough sledding continues and the market keeps making it hard to spot investments destined for trouble. But no matter the market conditions in 2010, I'll try to do better next year.
Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.
GMAC's request for new cash -- up to $3.5 billion, according to reports -- isn't any surprise, the auto finance company long ago cemented its reputation as the American International Group Inc. of the auto industry: it's too connected to fail.
2:18 p.m. Dec. 30, 2009 | Comments: 133
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