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Talkin' Trash



December 29, 2008 – Comments (0) | RELATED TICKERS: AIG , CIT


Back in the day, I used to play hoops nearly every day.  An important part of streetball is the ability to talk trash, you know the old "In your face," "You wanna see it rain?"...etc.  That's not the sort of trash that I'm talking about here though.  I'm talking about buying garbage investments no sane person would purchase because normal investment analysis would lead one to believe that there's no way that the companies involved will survive.

That's the sort of thing that I have been sniffing around lately.  I've already circled the wagons with a bunch of relatively safe dividend paying stocks that I plan on holding for a number of years.  Now it's time for some fun, in the sense that going to AC or Vegas is fun.  I have been picking up tiny stakes in companies that the government has been using our tax dollars to keep alive.  As the old saying goes, in for a penny, in for a pound.  The theory behind my small investments with huge upside potential is that the government will continue to shovel money at some of the companies that it has been helping rather than seeing its initial investments completely wasted in such a short period of time.

Interestingly, this month's Forbes has an excellent article on this subject: Big Brother Investing.  It centers around a very smart man who I have tremendous respect for, Pinco's Bill Gross.  He basically says that he has been purchasing bonds and preferred stock of the types of companies that I just mentioned, messed up firms that have been receiving huge handouts from the government.  This quote from the article sums up Gross' thoughts on the subject nicely, "Gross' theory is that the government will arrange to get itself paid back and that his investors can safely travel on the government's coattails."

A couple of months ago during the height of the market sell-off, I purchased American General Finance and CIT Group bonds with close maturity dates.  These pieces of junk were selling for $0.50 on the dollar with yields-to maturity of well over 20%.  Interestingly, the AIG issue is one of the specific investments that Gross mentions in the referenced article.  I have not purchased any preferred stock yet, because I perceive preferred dividends as even less safe than interest payments on bonds, but Gross makes a strong argument for doing so.  The government wants the money that it has already spent back and it wants to prevent shocks to the system, so it is unlikely to let any other major financial institutions fail...particularly with Tim Geithner continuing Paulson's work and Bernanke still at the Fed.

If I do purchase any preferred stock, I plan on being patient and letting it come to me and buying inflation-protected shares.  This sort of preferred stock basically acts like TIPS.  Their interest rates increase increase as inflation does.

This sort of investing is not for people who are risk-averse.  I am purchasing small stakes in these companies and I'm spreading out my bets.  It should be an interesting ride.


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