Thursday, July 10, 2008

The Only Stock You Need

One of the persistent myths in the world of investing is that there is single answer to the question of how to make money in the market. Today as we witness the U.S. government agency, Fannie Mae, continue its free fall I am reminded of the cover story of a popular investment magazine a few years ago. The headline was, "the only stock you need to own."
The accompanying story about Fannie Mae was no doubt compelling and logical, the kind of easy idea that lodges in one's brain forever. Fast forward to today and the assertions that Fannie Mae is insolvent and in need of a government (taypayer) bailout. Those who took this sage advice and let their magazine subscription lapse before learning of the next sure thing have watched FNM and their investment fall 87% this decade.

Earlier this year a relative told me in no uncertain terms that the only investment he needed was Berkshire Hathaway. I try to avoid such discussions with friends and family so at that point we went out to a movie. Berkshire is now about 20% lower in the meantime. The first rule of investment is preserve capital. Berkshire's 25% loss since September means it needs a 33% gain to get back where it started. That kind of return is no mean feat, even for the Oracle of Omaha.

I cringe to overhear denial and revisionist history from investors. In the locker room of the health club I belong to I overheard a discussion of why a member's investment in Citicorp was still ok. He was still, "above my cost basis." This somehow seemed more important than the 73% loss of value this decade. Ouch. If that performance came during retirement it could be devastating.

Even the mutual fund universe is littered with flotsom of the last good idea. How many bought Amerindo Fund when the manager could do no wrong in the dot com boom? Perhaps a gold fund or real estate fund would have made more sense in the ensuing few years. Investors who bought those steel, coal, oil might consider as well if now those prescient purchases aren't also ready for review or rebalancing to strategic levels.

Pigs get fat, hogs get slaughtered.

John Barnyak