Ah, Hindsight December 4, 2001February 20, 2017 David Maymudes: ‘Did you ever do a follow-up from your column of 11/15/99 (the day before the initial Borealis column)? It appears that just one of the six stocks did decently, and I wanted to hear if you were long or short that one.’ ☞ I forgot all about that! But, yes, it’s a fair question. Let’s see. The column was in the context of ‘year-end specials’ – doggy stocks so beaten down by tax-selling that they might just bounce when January rolled around. This is a phenomenon that may even have some logical underpinning, and which you may be able to use to your advantage in the next few days. Say a stock is down from $32 to 50 cents but is really, almost surely ‘worth’ $1.50. (Not that one can usually tell that with much assurance what a stock is worth, but let’s pretend.) Why would any rational investor sell you his shares at 50 cents? Taxes. It can make perfect sense to sell at 50 cents, because realizing the $31.50-a-share loss might save the seller the equivalent of $5 or even $10 or $15 a share in taxes. (Say that between federal and local income taxes the seller is in the 48% tax bracket, and that this loss could be used to wipe out otherwise-taxable short-term gains. In that case, selling the stock lowers his tax bill by an amount equal to 48% of his $31.50-a-share loss – better than $15 a share. This is an extreme example, but makes the point that selling for 50 cents – a mere third of what the shares are worth – can make sense for the seller even if the stock does then triple in January and February, once the tax-selling pressure has been relieved, and once some of those tax-sellers, having waited the requisite 30 days, have come back in to re-purchase their shares, adding to demand, because they agree with you that the shares they sold are worth more than 50 cents.) That said, a lot of dogs really are dogs, and you can lose a lot of money blindly buying Enron at 22 cents just because a lot of investors who paid $70 or $80 or $90 may be selling ‘at any price’ to lock in their tax loss before year’s end. I know nothing about Enron’s prospects, but you have to allow for the possibility that the 100,000 shares you might buy for a mere $22,000 today could be worth exactly $0 at some point in the future. So two years ago I wrote that column giving examples of six dogs, two of which I owned for the bounce, two of which I was short, thinking they’d drop even further, and two of which I knew nothing about. I didn’t want to tell you which were which, because I was afraid you might follow my lead and lose money and hate me. At least I got that part right. (I then proposed that each of you decide which two of these six to go long and which to go short and e-mail me your hypothetical portfolios. Almost none of you took the bait, leading me to think that a lot of you say you want these columns to be about money, but you really just come here for the politics and recipes.) I forgot about this column and never followed up. But now that David has reminded me, here were the six dogs: Clayton Homes (CMH) U.S. Floral (ROSI) Iomega (IOM) Criimi Mae (CMM) CompUSA (CPU) Ultralife Batteries (ULBI) ‘Remember,’ I wrote at the time, ‘I am NOT recommending you buy or short any of these. If you do look into one and decide it’s going lower and it does – more power to you. I hope it’s one of the two I’m short. And if you decide another is going higher and it does – more power to you for that, too. I hope it’s one of the two I’m long. As for the two I have no interest in either way, I hope – well, what do I hope? I guess I hope they just prove very boring.’ (I went on to stress that shorting stocks ‘is a very bad life choice for almost everybody; and buying doggy stocks is almost as risky. So this is more for fun than anything else.’) So how did my dogs do? The two I owned were U.S. Floral, which went to zero, and CMM, which I still own. It is down pretty sharply, but along the way distributed some preferred shares to its common shareholders and then did a reverse split. In the long run, I like to think I may do fine. But I sure didn’t get any bounce out of this one in January, 2000, or, for that matter, in January 2001. Overall, had I invested equally in each of these two, I’d guess I’d be down by about 70%. The two I was short, Iomega and CompUSA, were a mixed bag. Iomega is down by about two-thirds, which is good (if you’re short). But CompUSA got bought out – a short’s worst nightmare – at about a 40% premium. So on balance I came out a little ahead on the shorts, but not much. As for the two I knew nothing about (it would appear, with hindsight, I didn’t know a whole lot about the other four, either), Clayton Homes is up about 20% and UltraLife Batteries is about where it was. Have I mentioned a lifetime of periodic investments in low-expense, no-load index funds? This is the sensible way for most people to invest in the stock market. And yet I have my eye out for some year-end specials.