I’m fond of telling people that I bought Bank of America (BAC) about a year and a half ago at $52 a share when it was supposedly “cheap.”
Its price-to-earnings ratio was around 9 and it paid a respectable dividend.
Well, as the banking crisis continued to unfold, Bank of America’s price continued to slide, and because I was adhering steadfastly to my rule of selling any stock at an 8 percent loss, I cut my losses before serious damage was done.
But as I stared at the ticker on CNBC this past Friday, I was shocked to see Bank of America trading for 3 bucks and change. Holy cow, I remarked to my wife.
“Some people are going to make a killing,” she said, referring to those with lots of cash on the sidelines to pour into beaten down stocks.
But I believe that any speculation on devalued stocks at this point is nothing short of gambling.
In fact, Jason Zweig of The Wall Street wrote over the weekend about the perils of playing what he called “lottery stocks” — stocks that have fallen so far in price that investors desperate to make up for recent losses pile into them in hopes of winning the big one.
“Like a Powerball ticket, these stocks cost almost nothing and offer a high chance of losing,” Zweig writes, “but that still leaves them with a kicker of hope, because if they do ever win, they could win big.”
Zweig spoke with a finance professor at the University of Texas at Austin who has done research that shows people load up on these lottery stocks most during economic downturns.
Every once in a while a lottery stock will win big, the professor said, but more often than not it won’t.
Nationalize the banks?
The weekend Wall Street Journal carried an interesting interview with Nouriel Roubini, a professor at New York University’s Stern Business School.
What was interesting about the interview is that Roubini is in favor of what the prevailing market sentiment seems to be against: nationalizing the banks.
Do it, Roubini says, otherwise we’ll perpetuate the ongoing banking crisis for much longer.
Roubini says that even banks that look solvent today are probably going to start looking insolvent six months from now.
He says it doesn’t make sense to pour huge sums of money into soon-to-be-insolvent banks in order for them to take over banks already insolvent.
“It doesn’t work!” Roubini told the Journal. “You can’t take two zombie banks, put them together, and make a strong bank. It’s like having two drunks trying to keep each other standing.”
Roubini advocates a temporary taking over of the banks by the government for restructuring and eventual placement back with private ownership. If nationalization is a dirty word, then call it “temporary receivership” he says.
What do you think? I’d like to know.