I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing readers of these posts with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments NOT A RESEARCH SERVICE/Add of PWE Last Week These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. Anyone interested in a topic may want to review all discussions contained in the blog about it by using a relevant search term in the box at the top. Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post.
Thursday, May 28, 2009
Sold BACPRE/BAC Exchange Offer to Convert Equity Preferred into Common Stock/ Making Decisions with Incomplete Information/
Update 6 09 2009: I see a number of new visitors coming to my blog seeking information about the Bank of America conversion offer. At the time that offer was made, I owned two equity preferred floating rate issues which were included in this offer, BACPRE and BMLPRG, and I sold both of them. I had just bought BMLPRG a few days before the BAC offer, and was just happy to reap a quick gain of close to 50%. I bought those two issues to diversify my floating rate holdings, an important part of my bond asset allocation. For anyone interested in floaters, this is a link to my Gateway Post that contains links to my discussions of them: Floaters: Links in One Post.
I already own all of the shares of Bank of America common stock that I want, and I have no interest whatsoever in exchanging those equity preferred issues for common stock. I was just pleased to sell both of my equity preferred stocks at a nice profit. When the exchange offer expires, I will check on the prices of the Bank of America equity preferred floating rate stocks to see if any of them fall back into my buy range. I bought BMLPRG at $8.8 on 5/20/2009:Minutes Afternoon Staff Meeting/Bought BMLprg at $8.8/ Sold 2 HSBC Bonds
There are several floaters that I would be interested in buying at prices prevalent before BAC made its offer, as I discussed in this prior post: Nerd Talk by LB this Morning 5/20/09
All of them would have to fall substantially in price for me to be interested in buying one of them again. I will be interested to see what happens to the pricing after the offer for conversion expires. My interest in them is primarily to add diversity to my floater holdings.
***************Original Post:
1. Bank of America Exchange Offer to Preferred shareholders/SOLD BACPRE: I own shares in two equity preferred issues of Bank of America, BACPRE and BMLPRG. Those issues are surging this morning based on an exchange offer made by BAC today, which is summarized in this press release. Bank of America Announces Exchange Offer For Certain Series of Preferred Stock - May 28, 2009 I sold my shares in BACPRE at $15, which was up 45% this morning, and will simply find another floater to buy with the proceeds. I can not ignore a pop like the one received today. As to BMLPRG, I want to think about it some more. It was up 32% this morning at the time I sold BACPRE. The consideration amount offered in the share exchange for BACPRE was $16.25 and $15 for BMLPRG, calculated in the manner described in the press release. I just bought BMLPRG, so sometimes a blind squirrel can find that acorn. I purchased it based on considerations entirely different than the one that launched the equity preferred shares into orbit today. I did a quick comparison of the issues listed in the BAC press release with the equity preferred issues listed at QuantumOnline. Preferreds eligible for the 15% Tax Rate Table - QuantumOnline.com
All of the issues mentioned by BAC in this morning's press release are equity preferred issues, and none are Trust Preferred. The TP issues have barely budged today, see e.g. BAC-PB: Summary for BAC CAP TRUST X - Yahoo! Finance
2. Stock Mutual Fund Managers as a Class have a longstanding record of being beaten by Dumb Indexes: This is a link to data compiled by S & P that should dispel once and for all the myth that mutual fund managers are capable of outperforming a dumb index.
Why would I as an occasional intelligent human pay a mutual fund more money to earn less than an index fund?
3. Having to Make Decisions with Incomplete or Erroneous Information: One of the many perils of investing in most asset classes is that decisions are invariably made with incomplete and sometimes erroneous information. I touched on this topic in a prior posts. Bungee Jumping Aegon and ING Preferred Stocks/ BlackJack and Stock Investing: Lessons Learned & Applied
When I know that I do not know something that I need to know to make an intelligent decision, I become very cautious, and will try to control my risk mostly be limiting my monetary exposure. FCY: Forest City Senior Bond & Discussion of Process Use to Make a Purchase Decision/ Any decision about purchasing a bond or a stock is made knowing that I am making the decision with inadequate information. There is never enough information. I can only cut down on the number of mistakes by trying to gather all of the information that I can as an individual investor, and then try to analyse and evaluate it as best as I can at my advanced age and limited mental abilities. Then, there are alway lurking out there the larger macro issues that would impact the future of virtually all companies, such as the rate of economic growth or the length and depth of a recession, inflation, interest rates and so on. At best, I can only make guesses about those larger issues. So, my choice is to hide under the covers with bank certificates of deposit and treasury bills or to do the best that I can knowing that every decision made has to be with incomplete and sometimes inaccurate information based in part on an educated guess about future macro type issues. I have always chosen the later course.
But the reason of this discussion this morning has more to do with my purchase of an American General Finance bond in 2007 which matures in a few months. At the time that I made this decision, I was striving for safety. I relied on the AAA credit rating given by rating agencies to this company. I even looked at an earnings report at the SEC. I knew that American General Finance was a subsidiary of AIG. I thought that I knew a lot about AIG. In other words, I did my homework, and I believed then that this was a safe and prudent decision.
There was one piece of vital information that escaped me, notwithstanding my efforts to gather all pertinent information about this investment decision. I did not know until sometime in the Fall of 2008 about the activities of AIG's Financial Product Unit in London. If I had known, I would not have bought any debt in AIG or any of its subsidiaries in 2007. I have discussed the mind boggling stupidity of the Masters of Disaster at AIG, and this is just a listing of a few posts on the subject.
In retrospect, buying AIG subsidiary bonds as a safe haven in 2007 was a mistake. But, it was not a mistake based upon what I could have reasonably discovered about AIG at that time. All that I can do under those type of circumstances is to limit my risk to any company to a limited amount of money, so that one failure or even a small group of failures, will not have a material impact on me. That is one reason why I have over 300 securities in my portfolio.
One of the critical mistakes an investor can make is just to put too much in the securities on one company. I was watching CBS news last night. A retired couple had most of their retirement savings, around $700,000, tied up in General Motors bonds. That would be an extremely serious mistake with any security. GM's New Deal - CBS News Video
Added 11:30 a.m. : The recent earnings of American General have been dismal. SECURITIES AND EXCHANGE COMMISSION Fitch recently downgraded its bonds to BB with a negative rating watch. Yahoo! Finance
Added: I thought that I would add a link to the Google Finance chart for BACPRE. It shows a price of just at $3.45 on 2/23/09. BAC-E: 14.58 +4.28 (41.55%) - Bank of America Corp. PRFD 'E'Admittedly I did not have the nerve to buy at that level but then I did not sell either in a panic.
DISClAIMER
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