What I will say is that I believe that the more you pay for the stake in a business, the less likely it becomes that you will be able to sell it to someone else at a higher price. In the land of investing, risk comes from overpaying — the winner’s curse. I would say that it is certainly less risky to pay less for something if your objective is to make money by selling it off at a later date.

The way I see it, there are two kinds of risk in the stock market. There is good risk and bad risk. More emphasis should be placed on the bad kind of risk because by being able to avoid it, investors can outperform the market in the long run — which is what most of us are interested in. Most bad risks come from people that don’t understand what they are doing.

A few examples of bad (dumb) risk would be: picking up pennies in front of a steam roller, riding your bicycle down the Autobahn, lying under oath, drinking and driving, or deciding to fight the guy at the bar that looked at you funny. The outcome is unknown, but you are likely to not be excited about it. The examples here are the stocks listed above. Battleship sunk!

A couple commonly believed good (intelligent) risks: studying for an exam that you want to pass, going to work if you want to keep your job, or exercising and eating a healthy diet to feel good. The outcome here serves more as a confirmation bias that makes these risks sound self-evident, but they aren’t that obvious to everyone. I try to keep 100% of my portfolio in this category. A couple new ideas that I haven’t talked about yet are Patriot Capital Funding (PCAP) and MCG Capital Corporation (MCGC). That said, you might want to consider the rising tide in Bulk Shipping with Star Bulk Carriers (SBLK), FreeSeas (FREE), and Danaos (DAC).

There are only a few examples of definable risk: rolling a dice, most games in a casino, and flipping a coin. The outcome can be precisely calculated. There is nothing in investing that I would say has a definable future real net present value. There is so much fluctuation between stock prices, currency prices, inflation, treasury yields, and expectations that I don’t feel confident predicting anything with 100% accuracy.

Believe it or not, there are examples of no risk: jumping out of a plane with no parachute, driving your car at 100 mph into a brick wall, traveling into outer space without a space suit. The outcome is in my opinion well-known. Unfortunately, there is no such thing as a sure thing in the stock market. Deals can always change — even after they are announced.

Some investors justify making risky decisions based on their likelihood of achieving higher returns. In times of crisis, the price of the stock market goes down. Some perfectly good stocks go down more than 90%. Wouldn’t it be nice to be able to find these and pick them up for pennies on the dollar? That’s what I try to do. The trick is not stepping into the “fear breeds fear” market and wait for the lower valuations to begin to appreciate across the markets and signs of early strength. Then, hop aboard the rising tide on the companies marked down 90% in price that are fundamentally set to appreciate more than anything else you can find.

Some investors pay people to actively diversify their money across companies at mediocre prices. The investment vehicles here tend to be ETFs and Mutual Funds. That said — this is a generalization. I know of several mutual fund companies and managers that I really like and I would even go as far as to recommend them to people who don’t know how to invest themselves.

In the investment world, there are 2 questions. Where do you put your money? When do you do it? It’s just that simple. You could put your money into high flying stocks at market bottoms, or you could put your money into undervalued companies at market peaks. Either way, you are fighting the wrong battle. At the market bottoms, you don’t want to be fighting off Winner’s curse. At the market peaks, you’re missing the perspective of how a negative trend bludgeons most investors’ risk appetites to death. Even though I’m making money since June 2008, I’ve been fighting the wrong battle for the majority of my tenure. I was simply trying to outperform the market. That’s what I used to be interested in. Now I’ve refocused on not losing money and I’m doing a lot better.

Discloser: Glen and his investors own PCAP, MCGC, DAC, SBLK, FREE.

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i need to look at
bucy, cedc, midd, and my old stocks again to dump some money into for an investor that wants a safer play.

Now — for some emails:

First, a picture: I picked the bottom on this one. Luck or skill — your choice.

So, what do we do now? It’s got a P/E of about 10, maybe a little higher than that. You are getting a 6.4% dividend here. The trailing 12 month P/E is 14.

Historically trades between $60-$70. Was as high as $50 recently.

You’re looking at 1 year upside potential of about 75% (maybe going higher than where they traded historically cause they picked up National City). I think we could very easily sell out of this around $50 here shortly — or you could just bail now and try to ride something else with more upside.
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T — I didn’t bet on this one. I don’t know whether it will outperform or underperform. If you don’t know, don’t bet.

You bought it at $20, which baffles me because its 52-week low was $20.90 according to Google. So, you got the bottom, luck or skill.

There’s a double bottom on this one in October and March around $21. They just increased their dividend in Q1 2009. Their dividend is sustainable and pays 6.9%. There was some huge acquisition or something at the beginning of 2007 that exploded revenues. I think from mid 2007 to mid 2008, this was overpriced because of this abnormal growth.

I’d be getting out at $30. I might even be willing to jump ship at $25 depending on if there is something else out there that’s better.

I just downloaded all the larger companies I was looking at this fall. Out of the batch of them, there are probably over half that are still improving as if there wasn’t a crisis, but are priced now as if the crisis is supposed to hurt business.

I’ll be sorting through them here shortly and if I think I can choose 2-3 of the best to replace PNC, that’s what I’ll do.
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UTVL-Good call on the details. It is incredibly undervalued compared to its competitors. It just got listed on NYSE amex. There is some dilution.

Their SSD segment is losing sales fast. I don’t know if that’s due to cannibalization or what. Other segments are growing well. This last quarter they did not grow rev or earnings, but I think that’s probably due to seasonality and the worst of the recession.

I’ll probably invest a little and see what new things develop.

Tom
On Sun, May 24, 2009 at 10:02 AM, Bradford, Glen Richard wrote:
I think you are wrong here.

There were about 41M shares outstanding according to their 10K.

Then they reverse split on march 31, 2009. http://www.pinksheets.com/edgar/GetFilingHtml?FilingID=6513635

I think google’s share count is right.

What are your thoughts?

Glen

From: tcorm [mailto:tcorso] On Behalf Of Tom Corson-Knowles
Sent: Saturday, May 23, 2009 1:04 PM
To: Bradford, Glen Richard
Subject: UTVL

Hey,

UTVL has the wrong market cap shown on google finance. There are 38M share outstanding, so the real book value is almost $230 M. With $18M expected income for 2009, before dilution, that P/E seems high at over 20.

Tom
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The price goes up about 5% on the announcement and transition weeks, then trails off 5% over the next 6 weeks

________________________________________
From: Bradford, Glen Richard
Sent: Sun 5/24/2009 10:09 AM
To: McConnell, John J
Subject: OTCBB to NYSE Stock
Hey John,

First, I’d like to thank you for passing me in Finance the 3rd module this year. Second, I want your opinion on the average stock price changes on a company that goes from OTCBB to the NYSE.
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Hi Glen,

if you like ACAS, you’ll love PCAP.

PCAP is in the same business, but has far fewer bad loans and a lower price/book, P/E and debt/equity.
They have violated bank covenants also, but only barely and recently.

Debt/equity is .96 vs 1.58 at ACAS, P/E (2010) 2.3 vs 4.2, price/book .22 vs .26

Slightly more expensive, but not much, is MCGC, which is in compliance with all covenants and will resume dividends earlier than the other two.

Among the chinese stocks, OPAI.OB is still trading at a P/E of 2, and half of book despite 30% growth.

I enjoy your articles very much. They are the best of all on SA, and I made a lot of money thanks to you.

Regards,

Fred

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