One Last Thing Before Gummi Madness

Several of you wrote last week to tell me I should not be writing about impeachment and/or to say I was dead wrong. Tomorrow, I return to Gummi Bears – but I want to mention two last things first:

• Late in the debate, I heard that Benjamin Franklin had called impeachment “the alternative to assassination.” When the leader simply had to be removed before his term was out, another country might just kill him. Our wise founders devised a more orderly course — impeachment. We shouldn’t trivialize what the president did. But as a huge majority of Americans seem to be saying in the polls, we shouldn’t kill him for it, either.

• Bob Livingston should not resign. Because if he should, then all the elected officials in the country who have ever been unfaithful should resign. And one could argue that anyone who made a vow “till death did them part” but then broke that vow — sanctimonious Georgia Congressman Bob Barr, who’s on his third marriage, comes quickly to mind — should resign. And the Jefferson Memorial should be torn down, and all those Kennedy high schools should be renamed, and George Bush, a fundamentally decent man, should never have been president, and Henry Hyde should be out, too. No. We should strive for perfection and honor it. Truly. But it should not be a requirement of service.

Now, on to the important stuff.

Have you combed your portfolio for losers? It’s not too late to sell them and use the losses to cancel out taxable gains — plus up to another $3,000 in ordinary income. (If your realized losses exceed your realized gains by more than $3,000, you get to carry the excess loss over to future years.) I assume you’ve already done this; but if you haven’t, it may be because you can’t bear selling something (or covering a short) at a loss. I know the feeling. And my own view, oft expressed, is that if something was a good buy at $20, say, it may be an even better buy here at $10. (The flip side of this is: Why do you think you’re so much smarter than the market? If with the market at record high valuations it thinks this thing’s only worth $10, then maybe there’s something you haven’t considered.) I certainly have some energy stocks like that. I figure that one day energy prices may start to rise again, and this abandoned sector will rebound. I don’t want to sell at the bottom. Of course, this may not be the bottom. And in any event, I could sell shares in my depressed oil-and-gas-related stock to get the tax loss and buy a like amount of some other depressed oil-and-gas-related stock.

The other thing to do this time of year is play the tax-loss bounce game. That is, identify a stock that has done so badly during the year that people are dumping it in droves for the tax loss … and whose prospects are so bleak, few bargain hunters are willing to sop up the supply. The trick is to find such a stock that, nonetheless, represents some value. Many of them get beaten down by year-end tax-selling but then beaten down some more by continued losses, and then beaten down in bankruptcy, and then just sort of disappear. I’ve had lots of those. Others survive, and when the tax-selling pressure is over, bounce back. Indeed, with some, most of the bounce comes in the first few days of January.

Recognizing this “January effect,” many folks have learned to anticipate it. They start shopping for these things in December — so it becomes the “December effect” — or even earlier.

One truly awful, dreadful stock this year was children’s book publisher Golden Books Family Entertainment — GBFE. It was over $8 just seven months ago, down from a high of $24, and is 34 cents as I write this. It will either be zero, ultimately — the most likely outcome, given its losses and debts — or perhaps a rescue will be arranged that salvages something for the stockholders. All I know for sure is that a lot of shareholders are dumping it in disgust to get the tax loss, without even taking the time to research its prospects. I am one of them. But I’ve only dumped the shares in which I have big losses. The ones I bought for under a buck I’ll hang onto. By next year — completely worthless — they could provide yet another tax loss. Or maybe I’ll get lucky and this will be one of the ones that survive.

My point is absolutely not that you should speculate in GBFE. I don’t know enough about it, and what I do know suggests to me it is essentially hopeless for today’s stockholders. (Maybe after a bankruptcy and a change in management, the company will come back to life; but in a bankruptcy, the common shareholders are generally left with nothing or next to nothing.)

On the other hand, I do think that as a class, these losers tend to be undervalued, because the same kind of irrational emotion that can drive winners to crazy heights can, when things are bad, work more or less the same way in reverse. Especially when you consider the tax incentives of selling. (If you paid $24 a share, who cares whether you get 60 cents or 34 cents or 8 cents when you sell? A wipeout is a wipeout. Plus, with a December 31 cutoff, you don’t have the luxury of waiting. So you sell at any price.)

So if you had $1 million and chose to spread $50,000 over five such stocks — 5% of your total portfolio channeled into this game — you might, on average, come out OK. (Or you might just have another $50,000 tax loss next year.)

Nor should you look only for the near-bankrupt stocks selling for pennies. There are some energy stocks these days, to take just one example, that — beaten down by events and tax-selling — are, nonetheless, far from broke. They might never bounce back, but they might. One such speculation I’ve owned for years, Canada Southern Petroleum (CSPLF), sells for under $5 and might be one of the five you play this game with.

But you really have to believe you could lose every penny of the money you speculate with this way, because you certainly could. And speculation itself can be a very dangerous, addicting thing. Let’s put it this way: The devil is not sitting around with a pitchfork hoping he can prod you into index funds.

Tomorrow: Gummi Madness