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  • Calling The Bottom… or not

    Posted by Carl from Chicago on July 11th, 2008 (All posts by )

    In financial circles it is common to use the term “Calling the Bottom”. What does this mean? It means that when a stock is beat up enough and poised for a rebound, that is the time that you want to buy. The real trick, however, is when something really hits the bottom, or if it has further to fall.

    Recently there has been carnage in the financial sector. Bear Stearns had to be rescued by JP Morgan when they collapsed, and Citigroup & Merrill Lynch had huge write offs. This has continued into the quasi-government entities Fannie Mae and Freddie Mac.

    While the vast majority of my investments are in index funds (or income investments), from time to time I like to think I am a stock picker and will put a negligible amount of my portfolio into this type of work.

    I picked four stocks that I figured (maybe wrongly, in hindsight) that might be near the bottom right at the end of 2007, and started this post back in April. My fellow blog-mate Dan has been hounding me to clean up my “draft” posts (he is a blog-neat freak, but that is good for all of us) but I have been leaving it there to age, not like a fine wine, but like a room-temperature PBR, after all. My four stocks were picked based on 1) look, someone has to survive in the long run 2) some entities are “too big to fail” and the government will back them out.

    Here were the stocks at the time (end of 2007) and their prices:

    1) Citigroup – $29
    2) Merrill Lynch – $53
    3) Fannie Mae – $40
    4) Freddie Mac – $34

    Remember, I thought that they were AT THE BOTTOM at the end of 2007… this is when I was going to pick them up.

    Well, here we are in mid-2008 (six months or so later) and here are their prices today:

    1) Citigroup – $16
    2) Merrill Lynch – $29
    3) Fannie Mae – $13
    4) Freddie Mac – $8

    Thus my “bottom fishing” picks went down another 50% – 75% or so from where I thought that they were going to inflect and turn things around…

    So maybe it is time for another rule of thumb – I should “call the bottom” and then wait until it drops another 50% or so before I make my move… or just stick to index funds.

    Cross posted at LITGM

     

    6 Responses to “Calling The Bottom… or not”

    1. David Foster Says:

      You might appreciate this cartoon.

    2. gs Says:

      Bloomberg reports that the Office of Thrift Supervision has seized IndyMac Bancorp. The thrift, already gravely weakened as the housing bubble deflates, experienced a run on deposits after Charles Schumer publicly criticized it.

      Financial stocks are in for a new test on Monday.

    3. Carl from Chicago Says:

      I like the cartoon!

    4. Aric Says:

      No matter how far a stock drops, it can always drop another 100%.

    5. Lexington Green Says:

      There is a scene in Schindler’s list where a wealthy, fashionably dressed Jewish couple are hustled out of their home and put into a crowded room with a bunch of poor Jews with beards and long black coats and that whole look about them. The wife says, “it couldn’t be worse”.

      It can always be worse. It can always be worse. It can always be worse.

      What I tell you three times is true.

    6. Jeff Says:

      It will get worse. The capital that these banks need is more than they have today. Once you get past the stage 1 capital requirements, and look at all the off balance sheet stuff they are liable for, they are insolvent.

      Blame the speculators! (Just kidding on the last point)