Do you remember the card game "Old Maid?" I remember playing it with both my kids many years ago. They loved it. They hated being stuck with that odd queen at the end of the game. Now they’re young adults and have moved on. But I’m still playing the game.
I have no choice. Dozens, if not hundreds, of companies are pretending they’re not holding the Old Maid. In other words, they’re hiding the full extent of their bad debt, assets, and hedges.
The practice is worse than ever – thanks to the spread of the subprime contagion. It’s shown up in surprising places like municipal bonds and Chinese banks. Right now, companies harboring Old Maids are a dime a dozen. I fear that soon they’ll be worth a nickel.
If you don’t want to get stuck with a loser, how do you invest?
- It’s more important than ever to do your homework. That means going beyond relying on a company’s statements. Just a couple of days before Bear Stearns was rescued by JPMorgan, they swore their finances were fine. Meanwhile, plenty of people who follow Bear Stearns thought otherwise… and were making their suspicions known in blogs and the financial press. Not every rumor is true, but neither should you summarily dismiss them. Keep an open mind.
- Stick with high-quality investments in sectors you trust. There’s too much we still don’t know about banks and their exposure to bad debt – so stay away. Big companies with solid track records, substantial overseas business, and low debt may not make you a bundle. But, these days, it pays to play it extra safe.
[Ed. Note: ETR's Investment Director, Andrew Gordon, is the editor of INCOME, a monthly financial advisory service that uncovers income-generating stocks that promise safety (first and foremost), along with much-higher-than-average profit potential.]
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