Saturday, March 21, 2009

Three Dirty Letters that Could Make You Rich..

Anyone reading this blog probably already knows how much I love audiobooks. Among my favorites are the Peter Lynch and Jim Cramer books on investing, which I've listened to more than a few times during my sometimes seemingly-interminable jaunts down 395.

Anyway, Peter Lynch ran the Magellan fund in the 1980s, which was the runaway top performer among mutual funds at the time. Jim Cramer ran a hedge fund which also posted great numbers into the 1990s. Although there are many areas where Cramer and Lynch diverge, one of the secrets to their success included a willingness to go where others might -- to find bargains with growth potential, they took the (admittedly amoral) step of investing in areas that sounded morally shaky (Phillip Morris), mafia-associated (Waste Management), or just boring (say, a boring-sounding office supply company).

Right now, the three most toxic letters in the American English vernacular are these -- AIG. Nearly every single piece of media coverage (and there's no shortage of it) is negative. Whatever the rightness or the wrongness of it, it's easy to feel upset when your tax dollars are supporting huge bonuses for a company that nearly failed based on its own recklessness. And for politicians, it's easy to throw red meat at constituents by making displays of mock outrage. Those are ripe conditions for most everyday investors to be scared off completely.

Right now, AIG is trading at about $1.25 a share or so. That's way up from its 52-week low of 33 cents, but of course WAY down from its pre-crash high of $49.50. Assuming it doesn't completely go belly up (after all the brouhaha, do you really think *we'd* let it?), there's only one direction it can really go.

Let's say you plunk down for 100 shares of AIG. Chances are, if you're willing to hold on, you can ride that right up back to a *normal* P/E ratio when the eceonomy re-stabilizes (and yes, it will). Along the way, you might do really well if you reinvest the dividends that it and other financials will use to lure investors back onboard the train during the climb back to normalcy.

What's the absolute worst that could happen? You're out the cost of a very expensive dinner, a gift you might bring to a wedding, a few tanks of gas, or however else you look at just over a hundred dollars.

There is, however, a potentially huge upside, provided you're not too morally repulsed by the bonuses and the negligence that led to this situation in the first place to become involved. I'll close here by going back to one of my favorite Buffett-isms: "The key is to be fearful when others are greedy, and to be greedy when others are fearful."

So what's the key to the key? Turn on the TV and watch CNBC for a while. Now, are you feeling greedy? Or fearful? Take your pulse and find out -- you can't benefit from Mr. Buffett's wisdom if you ARE one of the "others" he talks about..

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