Stock Purchase opinions- is there a down side

[therotman]

to purchasing highly depressed stocks of companies our government seems determined to not let fail?

Fannie Mae FNM $0.70

Wells Fargo WFC $13.99

Bank of America BAC $6.19

AIG AIG $1.26

GE GE $9.54

Citibank C $2.62

General Motors GM $3.18


If they are not allowed to fail aren't they going to go up in value by large amounts when this mess is all over with? I'm not concerned with short term. If the government takes full control what happens to the stockholders equity?

Am I missing something here? These stocks all seem to be on the clearance rack at walmart and nobody wants to be seen buying them.

[Porsche-O-Phile]

If the gov't nationalizes a company, the shareholders get completely wiped out. That's one of the risks.

[Don Plumley]

Just because a company won't be "allowed" to fail does not mean that the stock won't be worthless. GM could go into a pre-packaged BK, and shareholders would probably be left holding an empty sack, for example.

But a couple of the companies on your list, GE and Wells in particular, in my view seem to be great long term buys.

[therotman]

If GM went into BK would the shares just disappear, or would I still hold the stock in the event of the company regaining profitability after the BK?

[Porsche-O-Phile]

Unknown. Given how screwy the world is right now, anything's possible. Once governments start getting involved, anything can happen.

Traditionally if a company is taken over/nationalized the stockholders are left with nothing. Whether or not the gov't does this or does some newfangled/funky arrangement is anyone's guess.

There's part of your reason those stocks are so cheap. The uncertainty is priced in.

[therotman]

Well they can't all fail, right?

One of them has to be a great buy, so if I buy them all.....

[Porsche-O-Phile]

Originally Posted by therotman

Well they can't all fail, right?

One of them has to be a great buy, so if I buy them all.....

Not a bad strategy, but the one(s) that survive have to do well enough to cover the losses of all the others... This might mean you end up holding them a lot longer than you intended.

And it's anyone's guess as to whether or not they can all fail. I tend to agree with you, but honestly in this economy nothing would surprise me. If every single one of those companies declared BK next week, I'd probably just shrug at this point and say "oh well". It really wouldn't shock me.

[therotman]

Originally Posted by Porsche-O-Phile

Not a bad strategy, but the one(s) that survive have to do well enough to cover the losses of all the others... This might mean you end up holding them a lot longer than you intended.

And it's anyone's guess as to whether or not they can all fail. I tend to agree with you, but honestly in this economy nothing would surprise me. If every single one of those companies declared BK next week, I'd probably just shrug at this point and say "oh well". It really wouldn't shock me.

I'm just playing with my retirement funds right now, and i'm in my early 30's so i have time.

My other account has my savings but that will be used for a deposit on a house in about a year so i'm not willing to risk it.

[Hugh R]

Take a flier on 100 shares of GE. GE is so diversified it will come back strongly. I wouldn't do GM though.

[126coupe]

Cash is king, stay liquid. Pay debt

[therotman]

Until I buy a house I don't have any debt. I'm 95% cash right now- i'd like to take a little more risk.

[VincentVega]

I just moved some of my 401k to a S&P index fund. I'm generally not a big fan of index funds, but considering how much it's down, it's due more upside. Of course, the past 2 weeks have been great. Maybe it's too late?

[Porsche-O-Phile]

Originally Posted by therotman

Until I buy a house I don't have any debt. I'm 95% cash right now- i'd like to take a little more risk.

Very smart. The time to do this is in your 30s through early 40s. I'm right with you (and until recently, it was working very well for me).

Just be careful to consider your sources. There are a LOT of scumbag brokers out there right now who are just looking for suckers flush with cash and will steer them to crappy investment products just to get the cash on their books. They do NOT care what happens to you, only getting their hands on your money.

I recommend OptionsXpress personally (I use them) as they are not sales-based, only an online trading portal. And they're extremely supportive offering seminars and real-time answers to questions you might have (e.g. call them up and say, "I'm interested in doing a straddle position on such-and-such - how does that work exactly?) They'll explain it without "steering" you or influencing your decisions to buy or sell or go long or short - like a good brokerage house should. YMMV.

I'm probably going to buy into a few of those above too (and a few others I'm watching), but it won't be GM that's for sure. I honestly think their days are numbered and they WILL be nationalized. I could be very wrong, but it's not worth the gamble, IMHO.

Properly played stock/option positions will give you a much higher return - even now - than real estate will. Don't be in any hurry to buy a house, prices ain't going anywhere but down for quite a while. Once interest rates start to tick upwards in earnest, that's when I'd try to make my move (within 3-6 months of that).