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Uncertainty of Risk, Real or Imagined?

August 21, 2007 | About:
William Spetrino Jr

William Spetrino Jr

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It has been said that "uncertainty" is necessary for above average returns and being that I achieved financial security and a huge return with Phillip Morris now Altria (MO) in the early 2000's I would be remiss to disagree. Warren Buffett in the 1960s put 40% his portfolio into American Express (AXP) during the "Salad Oil" scandal and was well rewarded. However Countryside Financial (CFC) seemed like a bargain at $34 per share on July 23 rd, which is down almost 25% from $45 on Feb 5th. Could this "uncertainty" with subprime be a similar opportunity? How do you distinguish between an Altria and a Countryside Financial? This article will try and help you distinguish.

When I bought Altria in 2000 and 2001 there was talk that smoking would become illegal in the US and the lawsuits that saw multi billion dollar verdicts that could bankrupt the company. My "theory" was that all the talk about smoking being illegal in this country was not valid and these lawsuits would be overturned on appeal. Would a country that was 6 trillion dollars in debt "bankrupt" the largest taxpayer to the US Treasury? Would the legal system be able to handle all the lawsuits that would surely flood the system? Even if this did happen Kraft was worth about what I paid for the entire company and International tobacco would be "basically" free. The 9.5% dividend yield was MORE than covering my debt service. Since 1957 18 of the top 20 performing S&P stocks were either pharmaceutical or consumer staples companies if reinvested dividends were factored in. This information and the low PE, High ROE and High Dividend yield (read past articles to "recap" how important these traits are) made me feel that with #1 US food company #2 Beer company and #1 cigarette producer with the discount price from averaging down provided a sufficient margin of safety. The "uncertainty" in this instance was actually more "imagined" than real.

Countrywide Financial Corporation, a holding company, engages in mortgage lending and other finance-related operations. The company operates in five segments: Mortgage Banking, Banking, Capital Markets, Insurance, and Global Operations. The Mortgage Banking segment originates, purchases, sells, and services non-commercial mortgage loans, as well as provides various loan closing products and services, such as credit reports, appraisals, title reports, property valuation services, flood determinations, and other related services. The Banking segment deposits and invests in mortgage loans and home equity lines of credit, as well as provides short-term secured financing to mortgage lenders. Is the subprime mortgage "crisis" real or "imagined"? The foreclosure rate nationwide has continued to increase and the glut in home sales are both proven by real statistics. Was the drop from $45 to $34 based on something real or "imagined? The key in these cases is what are company insiders doing?

When I owned MO Carlos Slim Helu, now the world’s richest man was a director that bought 4 million shares of MO between $20-$24 per share. He continued to own them for more than 7 years finally selling most of his stake last year. Certainly he felt confident. Countrywide Financial has had 111 sales by insiders over the last 15 months totaling over 4.5 million shares. Over 80% of the shares were sold by colorful CEO Angelo Muzilo who sold over 870,000 shares between Nov 1 and Dec 31 of 2006. Earlier in 2007 he sold over 2.5 million shares and then again on July 11 to the end of July he sold 610,000 shares. The first 13 days of August he "only" sold 278,000 shares as the price began to fall drastically. A person wondering if they should buy Countrywide at the $34 on July 23 rd which had dropped 25% in about 5 months should first look at the key insider transactions. One look at Muzilo's consistent selling would cause a thorough investor to realize that if the CEO was selling then maybe this subprime mess might hurt Countrywide in the near future and this "uncertainty was not imagined but VERY real. My point here is not to say CFC is good or bad but to show the difference between imagined and real uncertainty. How many investors want to buy a stock that the CEO himself has been selling the last 10 months? Keep this article in mind the next time you buy into "uncertainty".

About the author:

William Spetrino Jr
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.3/5 (26 votes)

Comments

musto
Musto - 6 years ago
It takes either a true genius like web or a dedicated mind who had done his homework

like billy did with MO, to see the difference between a perceived and a real uncertainty.

It's often easier and instructional to look back and see things in hindsight, but very difficult

to make a proper judgement in real time.

Of course having emotions involved in the decision making process doesn't make things

any easier.

For e.g. things have been very quiet lately in this forum. There is no doubt that most

people are very apprehensive about the things that are happening in the market.

Are the markets setting up for a sharp fallout like the October 1987?

Is the risk real or perceived?
armeetofo
Armeetofo - 6 years ago
very good articles above,

i'd better to learn how to deal with the disaster at the moment, not the past or future.

thanks a lot.
billytickets
Billytickets - 6 years ago
Yes the forum has become very quiet. Musto I don't believe that my analysis was one of a "dedicated" mind but instead of someone who understood that smoking was not going to become illegal.I mean does anyone think Wal mart or JNJ are going to lose theor moat? Curious to hear some comments. VOOCH was one of the few aggressive BUYERS maybe its because we are both from Northeast Ohio.lol peace
vooch
Vooch - 6 years ago
> things have been very quiet lately in this forum. There is no doubt that most

> people are very apprehensive about the things that are happening in the market.

> Yes the forum has become very quiet.

That's just me kicking Mr. Market in the balls.

If I kicked you in the balls, you too would be quiet.

I used to have a bot that measured chat room activity. Anytime the market tanked, chat room comments declined because there wasn't so many people bragging about how great they were - everyone was sucking up losses. When things were rosy, chat room participation was high again.

- Vooch

“Don’t confuse brains with a bull market.”- Humphrey Neill

armeetofo
Armeetofo - 6 years ago
people feel 2 times pain from lost than happiness of gain.

i lost some from gains, not to my capital yet.
musto
Musto - 6 years ago
My main position BRK gained sharply during the market fallout,

but some of my other positions like mco tanked nicely.

It's always educational dealing with your own feelings.

Like the bible says something along the lines of,

He who can control his emotions, can rule a city.

I'm always learning.

armeetofo
Armeetofo - 6 years ago
that's why i don't believe EMT any more, even market crash there are many stocks march up, some of my holdings do the same thing.

i did MCO and MHP 2 ptiches each one. they are declining. good or bad? up to you.

happy investing!
armeetofo
Armeetofo - 6 years ago
i bought AXP @ $57.439 today, it's my 4th pitch

here is my record on AXP:

1) 11/05/2004 @ $55.1356

2) 06/07/2006 @$ 53.92

3) 09/13/2006 @$53.4776

billytickets
Billytickets - 6 years ago
nice purchase armeetofo .WEll do you think wal mart is real or imagined fear? http://www.gurufocus.com/news.php?id=12434
billytickets
Billytickets - 6 years ago
well is the subprime mess real or imagained fear?
vuasu
Vuasu - 6 years ago
My WMT is now 10% underwater and LVLT is now 18% underwater and PTEN is 10% underwater. Should I add to good positions...which one would you add to?

Buffetteer17, did you look into CCRT? What is your IV for CCRT? Thank you.
billytickets
Billytickets - 6 years ago
vuasu No offense but WMT at 48 was certainly "no bargain"( it was fairly valued though WEB did buy at that level) according to my"formula" in my book Consume Consume and Consume More: ( email me at ticketbill@aol.com if you would like to order a copy)If you are still confident averaging down would be wise. Personally I have taken a small position in WMT and think at this level it is underpriced. Just my 2 cents.peace
billytickets
Billytickets - 6 years ago
Hope you averaged down into WMt. This is no countrywide where the CEO was selling from 45 and didnt stop until the stock became a "teenager". Fear about Wal Mart is most imagined IMO which spells great buying opportunity
billytickets
Billytickets - 6 years ago
Yesterday on CNBC an anlayst recommnded both WMT and Marsh Mclellan as 2 stocks which have been unnecessarily beaten up over"imagined fear".Maybe he read this article .His price target was low to mid60's in 12-18 months.

Time as it always does wil tell.My formula has many less BUY signals than others but the results have been satisfactory.Just keeping you updated.peace

armeetofo
Armeetofo - 6 years ago
billytickets Wrote:

-------------------------------------------------------

> well is the subprime mess real or imagained fear?

it's a real fear in the short term, imagined fear in long term, i guess

billytickets
Billytickets - 6 years ago


FYI NOrth Carolina treasurer office is investigating COUNTRYWIDE CEO Angelo Mozilos "stock sale "agrreement.Sems like he might of accelerated before the summer "credit crunch ". Mozilo "possibly" saw the REAL possibility of a credit crunch and decided to sell"more". BAC came in and "rescued" the company but those who invested in the 30s and 40s and thought they got BARGAIN got FLEECED.
billytickets
Billytickets - 6 years ago
is this REAL or IMAGINED FEAR?

http://biz.yahoo.com/ap/071011/countrywide_mortgages.html

Investing in a stock where the CEO who is SELLING his SHARES like a MADMAN is NOT IMAGINED but REAL.


JIM CRAMER doesnt have him on his CEO HALL OF SHAME but he should. DO you all AGREE?
billytickets
Billytickets - 6 years ago
Was E trade's drop yesterday real or imagined fear'? The analyst who "slammed them" and mentioned the bankruptcy also had a price target of $7.50. This is NOT my thing but those who saw this was "imagined fear" and bought at the close of business yesterday has made a nice hit.Ironically WMT is up today as well and JNJ after suffering this summer from"imagined fear" with all the stent news has RECOVERED nicely.
billytickets
Billytickets - 6 years ago
Was E trade's drop yesterday real or imagined fear'? The analyst who "slammed them" and mentioned the bankruptcy also had a price target of $7.50. This is NOT my thing but those who saw this was "imagined fear" and bought at the close of business yesterday has made a nice hit.Ironically WMT is up today as well and JNJ after suffering this summer from"imagined fear" with all the stent news has RECOVERED nicely.
billytickets
Billytickets - 6 years ago
Hey Mr VOOCH you still kicking Mr Market in the nutz and stealing his lunch money paisano?
mungerite
Mungerite - 6 years ago
This article talks about the difference between real and imgained fear

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