Rush asks Who is Taking the Risk if "Trash is King"?
As part of my daily routine, I typically check to see which particular stocks in the various indexes have been going up in price and which stocks are staying the same or going down. I noticed a trend over the last few weeks that many of the companies with decent balance sheets as well as increasing earnings in some cases, have been staying at the same price per share and in some cases even retreating. However, many of the companies that have seen the most growth over the recent rally have questionable balance sheets and in many cases negative earnings and in some cases their very survival could be questioned. In other words, the so-called "winners" are companies that would appear to me to be much riskier investments.
In light of the credit crisis, global recession and the recent market events that have resulted in massive losses by individual investors this trend has surprised me and I wondered if I was the only one noticing this developing situation.
I recently read the April 27, 2009 article in The Wall Street Journal, "Can a Rally Last On Diet of Junk?" The article begins "Trash is King. The biggest winners since the stock market bounced off 12-year lows in early March have been the most beaten-down names, which in the eyes of many investors, also have the riskiest outlook."
This latest development should cause individual investors to ask the following questions:
Who are making these riskier investments?
If fund managers are making these investments do the individuals that have money invested with these institutions really understand the risk that is being taken?
In the midst of a global recession, why would some institutional managers be willing to make such decisions?
Because of the enormous trading volume during this recent rally it appears unlikely that the only investors involved in buying "beaten-down names" are day traders, it seems more likely that institutional investors are also involved.
Do the individuals with assets in mutual funds understand the risks that are being taken in their behalf and the consequences if things go wrong? I find it highly unlikely that holders of mutual funds and other institutional investments understand the management of a particular fund as well as the risks involved with buying "trash" stocks. Many individual investors have already sustained substantial losses in their investment accounts and could see negative results again.
Why are some institutional managers taking the approach of buying the most beaten-down stocks even if a particular company is not well-capitalized or may even have negative earnings? Because they believe that these companies stand to have the greatest gain and could impact the short-term performance numbers of the fund which could draw investors to their funds.
What can the individual investor do to determine if the manager of a particular mutual fund is making questionable investments? They can request an updated statement from the mutual fund company that delineates the stocks that make up the fund. In light of recent market turmoil and the apparent appetite for risk as evidenced in the latest stock market rally, this situation is worth further review. Once an individual investor examines the underlying stocks that make up the mutual fund they may be completely satisfied with the fund. However, this is a good time for each investor to thoroughly analyze his or her own risk tolerance and make sure that the funds that they own are in line with this risk comfort zone. Russell M. Rush, Registered Representative, - Moloney Securities Co., Inc. 9990 Coconut Road, Suite 305, Bonita Springs, FL 34135 Phone: 239-390-1240
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