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EScroogeJr (< 20)

PayDirt philosophy: C-



February 03, 2007 – Comments (2)

Just visited the PayDirt site to read the introductory report explaining their philosophy. And I must say here, I wasn't particularly impressed, mildly speaking. In fact, I was not impressed at all.

The report is centered around the "revolutionary" new approach of looking for value in the dustbin. It goes on and on to extol the great prospects of this investing style. The risks, according to the Fool, include the inherent high volatility of these stocks, and the chance to find that the stock is cheap for a good reason. There is less emphasis on LTBH, and more attention is paid to timing. Buf for all their warnings and admonitions, the basic message is rather unsophisticated: "we will be successful becuase these stocks are so cheap and because we'll be the first to touch them, if only with a 10 ft pole".

Excuse me Fools, but this is just not serious.

There are multiple venues one can take to make a killing on the stock market, we all know that. And no rational person will argue that that one can make a fortune buying even something as repulsive as worn socks provided the price is right. Ok, so that is the new investment style, I have no problem with that. But when the entire "philosophy" is reduced to a self-obvious statement, I say the report clearly falls short.

A really good report would have to provide detailed, candid answers to at least the following questions:

-Statistically, is this a better playing field than stocks of growing companies with steady earnings?

-Isn't it true, from our consumer experience, that cheap s..t is usually more overpriced than quality goods?

-If this is truly a superior investing style, then how come nobody has built a superior track record buying broken companies? The domain of expensive high-quality stocks has produced quite a few "Microsoft millionnairs", "Starbucks millionnairs", "Birkshire millionnairs", and so on, and so forth. Anybody heard of "Lucent millionnairs" or "Enron millionnairs"?

-Realistically, what is the chance of picking the next MIDD vs. the chance of picking a piece of garbage?

-What about the old truism, "I'm not reach enough to buy cheap things"?

-How about a candid discussion of the pop?

I would call this is an unauspicious start. The Fool hasn't actually made money so far; a less than inspiring 6-month performance - and for the vast majority of subscibers the trial subscription will remain just that - a trial subscription. The shortcoming in their philosophy that are easily overlooked during a rally will become very obvious to everyne and even appear exaggerated as soon as the market goes into the bearish mode. Given that the first picks that will define the customer experience are already reflecting the prices at the market peak, I think PayDirt is treading a very slippery ground.

2 Comments – Post Your Own

#1) On February 04, 2007 at 1:04 PM, downwithpumpers (< 20) wrote:

If 99% of the people agree that with you that would be enough proof for me that you're wrong. It would show that everyone wants to sell the downtrodden and buy the well-loved. What's the result? The downtrodden gets too cheap and the well-loved gets too expensive.

As you might have guessed I'm an anti-slogan ""I'm not reach enough to buy cheap things"?" investor.

I don't agree with your examples Enron, Lucent, etc.. They were extremely popular and well-loved stocks. They were the expensive and high-quality stocks of the time. It was the phone company that cost investors many tens of billions of dollars, not a broken stock.

Lucent is a much better example for my side of the argument. It's down 95% and it's former CEO was called a cult leader when it was at its highs. HP paid Carly 69 million dollars to leave Lucent and join HP in 1999. That didn't happen because she managed a broken company.

There are many examples of companies rising from the ash heaps. Chrysler is probably the most obvious.

Do a google search for: superior returns junk bonds

and you'll see that the return of broken companies most often exceeds the default risk.

Do a google search for: fallen angels stock

and you'll see that this is not a new idea. Some people call it value investing.

Lucent had a 1000% rally before it became broken. Many tens of billions of dollars were made. Lucent also had a 1000% rally after it became broken.

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#2) On February 04, 2007 at 5:08 PM, EScroogeJr (< 20) wrote:

"Do a google search for: fallen angels stock

and you'll see that this is not a new idea."

No idea is new. But not all ideas are equally valid. I am sure some individual has made 1000% on LU. I question how often he picked LU at the very bottom to get his 1000% return as opposed to picking something like DAL before it went bancrupt.

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