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Michael F.: ‘I’m a little alarmed that you’re actually averaging down on this stock. I have no opinion on FMD, never been involved with it. I don’t really care how you personally deal with your FMD loss, but I do know a lot of your readers (including me) regard you as a personal finance role model. Therefore some may actually copy and follow your act. This may be the last thing you want to hear after suffering a huge loss (believe me, I’ve been there, just go take a look at the chart of IMGN – I owned 50,000 shares in 2001 ~ 2003, and more recently, the NSTK debacle, although in a lot smaller size), but in my opinion, buying a stock you previously owned after it has plunged is just throwing good money after bad – the market is telling you you are wrong. Is it possible that your guru has moved from the realm of fundamental security analysis into the realm of boneheaded-ness and wishful thinking?

‘FMD may come roaring back – who the hell knows, it may very well happen. If that is the case, you and your readers who followed your act would have taken the wrong lesson out of this. Reading your blog through the years, I get the sense that you seem to buy individual stocks as sort of a hobby/past time using what you allocate for ‘mad money.’ which is apart from serious personal financial planning and asset allocation that you advocate in your books. That’s fine. But if it is indeed a hobby, I would assume the goal it is to make money, not character-building, a test of will, or the pursuit of ‘being right.’

‘If the goal is to make money as a hobby, there are other ways than being a buy-and-hold investor. Perhaps a trader mentality is warranted — and what is the central tenant of a successful trader? In my opinion, famed commodities trader Paul Tudor Jones said it best, “Losers average losers.”

‘One thing I religiously do now is to follow William O’Neil (founder of Investor Business Daily)’s admonishment: whenever I suffer a 7% loss, I IMMEDIATELY sell it, no exception and excuse. I would cool my heels for a month, and then, having kicked the loser out of my portfolio, I can objectively analyze whether it is still worth a long-term hold. If it is, I will buy it back. The stocks may come back during the 1-month kick-out period, but I made peace with myself and accept that as part of the game: it is called risk management. And you know what? I seldom buy the stock back. Usually it’s because I was liberated to pursue other better opportunities.’

☞ I admire anyone with a plan and the discipline to stick to it. But there are different ways to skin a cat – and different ways to get burned.

Limiting losses to 7% will generally limit your losses to 7% on any given stock – with the occasional larger loss if a stock announces bad news after the close and opens the next morning down, say, 20%. But if you have three 7% losses in a row (perhaps the market is in a tailspin?), you’re now down 21%, when in the natural fluctuation of things the stocks might not be doomed after all.

Risk management is hugely important. But in my case, I’m pretty ridiculously diversified – and that’s my principal risk management device. Often, if a stock seemed to make sense at $30 it can make more sense at $17 – and then, yes, get a bid from Carl Icahn at $36. (That’s what Lear did.) Years ago I bought Audible.com (ADBL) at $3.75 (adjusted for a subsequent split), then more at $1.98 – I liked the service! – and then lots more at 96 cents – and ultimately sold bits and pieces a year later all the way up to $30 a share. Not typical, by any means. And I definitely have had it go the other way, where I bought more of something only to see a total loss. But I prefer to look at each situation separately. And, yes, stubbornness and ‘the need to be right’ probably do enter into the equation, and at a not inconsiderable cost.

All that said: the risk in FMD is definitely real, but I wouldn’t sell, or necessarily fail to buy more, just because it’s half price. Isn’t one of the recipes of success to buy a good company after a devastating – but survivable – misstep or shock? Like American Express after the salad oil swindle? FMD may not turn out to be that kind of story. But the freeze-up in the credit markets was not of FMD’s doing; and it may one day thaw.

Here’s the Motley Fool’s take.


Sam: ‘In most instances, as you say, bankruptcy does not dismiss the obligation of a student loan, but it is up to the judge’s discretion. Over the history of the federal student loan program fewer than 300,000 loans have been discharged due to bankruptcy out of the 242 million loans issued.’


This site is devoted to SPACs – blank-check companies – like Aldabra (which became Great Lakes Dredge & Dock, giving us a five- or ten-fold gain on our warrants last year) and Aldabra 2 (which is becoming Boise Cascade Paper, and whose warrants are up about 50% since July and will be up five-fold if, by 2011, the underlying stock, hit $14.50 or so). I’m not a member of the site, but someone sent me this emailed summary:

Tuesday, December 04, 2007 12:49 PM

Subject: AII – Aldabra II / Boise Cascade Paper, Packaging & Newsprint Road show started last week, Aldabara 2 remains a top pick as it still undervalued despite drop in peer multiples, current fair value range $10.25 to $16.10

* AII remains a favorite idea despite peer multiples coming down in the past month
* On a 2007 EV/EBITDA outlook, AII is now fairly valued at $10.25 vs $11.00 one month ago
* AII is fairly valued at $11.20 to $13.75 on a 2008 EV/EBITDA basis and $12.55 to $16.10 on a 2008 adjusted EPS basis (reflects the benefits of a low tax rate from the acquisition amortization tax shield)
* Thus at minimum AII should currently trade at $10.25 and should move towards the $11.20 to $16.10 range as confidence increases of hitting the 2008 EBITDA targets
* Boise Cascade (BCC) 3rd Q results gives confidence they will hit the $250M EBITDA target for 2007
* 2008 EBITDA range of $315M to $367M
* $315M EBITDA target appears highly likely as it reflects LTM EBITDA adjusted for October commodity paper (UFS) price increase and the annualized effect of recent mill conversions/enhancements and it does not include price increases in 2008 of several of product lines that are forecasted by industry analysts as well as anticipated input cost declines
* $367M EBITDA target appears reasonable as it includes all or part of the positive impacts of announced and anticipated price increases and excludes the benefits of declining input costs
* Strategically, AII is the best way to invest in the paper and packaging industry as it the direct beneficiary of the higher commodity prices from the capacity shut downs of its peers
* BCC has not participated in the capacity shut downs because it has a minority market share and thus enjoys the benefits of the higher prices driven by its peers who are doing the heavy lifting of reducing production in line with market demand declines
* If annual demand declines for paper and newsprint continue at the same pace then eventually Boise Cascade will have to cut production or invest more capex to switch production to other products, but for the next several years it should be able to continue to drive the same production with no shut downs especially if declines in UFS revert back to the normal 1% to 2% range from this years 6% decline
* BCC has 100% USD based operations which is an additional positive as some of its peers are being hurt by foreign currencies strengthening against the USD
* The Aldabra 2 management team has credibility (GLDD), good business acumen and a strong understanding of what they need to deliver to get investors excited and they have been regular buyers of AII common in the open market
* We see this deal as a high probability yes given it has a 40% max redemption, solid story and good valuation
* However, we acknowledge that it is hard to get excited about any paper company if a recession occurs and this could become a situation where a cheap solid name just gets cheaper
* We maintain AII as a top pick since the US is currently not in a recession, the recent trends in paper inventories are not concerning, Boise Cascade is strategically more interesting than its peers and AII currently trading below estimated cash per share of $9.72 should currently trade at $10.25+ creating a win-win investment
* We would not be surprised to see AII repeat the performance of Aldabra 1 where the common crept higher towards the vote and then had a nice break higher once the deal was approved. Please click on the Link to read the full analysis.

☞ Don’t sell your warrants.


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