Garda, Verenex and BCE follow-up

Allright, time for a little follow on previously mentionned stocks.

Let's start with Garda (GW.to). The stock is in an absolute freefall. Down more than 30% today on the Toronto Stock Exchange and closed at 1.58$. This is a stock that has a 52-week high of 20.82$. It seems that the stock is in the middle of a perfect storm: disappointing results, lots of debt, trying to sell a unit in the middle of a credit crisis... Things aren't looking too good and the market is really punishing it.

Verenex Energy (VRX.to) was also mentionned in an earlier post. After falling from 9$ to 7$, the stock had a 25% 1-week gain and has closed at 8.79$. Still no news about the strategic review (i.e. wanting to sell the company) but the operations are perceived has solid (by opposition to the disappointing Garda) so the stock hasn't been punished like GW.

Lastly, BCE closed at 37.20$ with a sale price of 42.75$ to be given in less than 3 months. It certainly still looks like an attractive opportunity from a pure arbitrage point of view but remember that the credit market is very tight and the biggest deal in Canadian history could potentially not get done because of lack of capital from the buyers.

As you can see, with the credit crisis, the merger and acquisition world is rough. Stock Investment Partner suggest that you be careful when trading on an arbitrage basis.

Warren Buffett invests $5 billions in Goldman Sachs

Warren Buffett, the ultimate "value investor", has stepped in the financial sector of the stock market big time. Indeed, Buffett's Berkshire Hathaway bought $5 billions of Goldman Sachs perpetual preferred stock and has 5-year warrants to buy $5 billions of common stock at $115 per share.

Considering that Buffett only invests in "what he knows" (see my last blog for more on that), this news is a big vote of confidence for Goldman. In a way it indicates that the selloff might have been overdone and value has emerged. That can be associated with the panic and overeaction that I have talked about in the past.

Buffett is not a market timer so this doesn't necesseraly signal the bottom but it certainly is an encouraging sign. I suggest readers of this Stock Market Investment Partner blog imitate Warren Buffett: stay calm, analyze and invest in what you know once you discover value.

Knowledge's place in stock market investing

Long story short, knowledge is key when you wish to be a successful stock market investor. Of course, you need at least basic knowledge of evaluation methods but that is not exactly what I'm talking about.

I bet you would never walk into a restaurant for the first time and then buy the business 1 minute later. However, some investors act like that with stocks. They see it's the biggest intraday gainer... and they buy some shares. They see an uptrend in its 3-month chart... and they buy shares. They hear the story of the friend of their coworker's sister that made money with a stock last week... and they buy shares. Please don't do that.

You should invest in what you know. Read a company's annual reports, news articles, its website, research reports, etc. Basically read everything you can find. Make sure that you know everything that there's to know about it. Then, if you still like it, buy it. If you can't understand its products, don't buy. If you don't trust its management, don't buy. If you don't understand some things on its balance sheet or feel that it is not giving you the "whole picture", don't buy.

I chose to write this because the events of the last few weeks made me realise that some investors must not know their companies well enough. We have seen irrational selling in some stocks that made me think "These people are selling great companies because Lehman is in trouble? Company X has nothing to do with Lehman! Company X is unfairly punished because investors don't understand what it does and what factors affect its performance". Also, we're learning now that Lehman, AIG, Merrill and many others had some serious unknown problems. Key word here is unknown. Investors didn't know their exposure to the subprime mess and gambled that they would be fine. Turns out, they shouldn't have invested in stuff they didn't know.

Please, invest in what you know.