Done deal

A new stock symbol has appeared in my list of investment holdings, BAC, aka Bank of America Corporation. But i did not buy this stock, but got it as a result of my investment in Countrywide Financial which got acquired by BAC in a stock deal. Hope to share this experience with anyone out there who is thinking about buying bank stocks.

Countrywide was a very interesting investment experience for me. For it is the first time that i veered away from the buy "good company at fair price" principle and tried to buy fair company at cheap price.

Performance (or the lack of it)
In terms of percentage loss, this venture was a disaster as nearly 80% of initial investment was lost.
In terms of dollar lost was bearable as only a few hundred dollars was invested.
In terms of impact on portfolio it was negligible as only a few percent of investable assets was committed to it.

The Story
I got interested in Countrywide as the subprime mortgage crises started to capture headlines in news report and magazines. Countrywide was the largest US subprime mortgage lender and its stock price got hit hard as fear of loan delinquency and its inability to raise capital was put into question. After BAC injected $2bn in fresh capital into the firm, i thought the capital adequacy ratio of CFC was very comfortable. At about $18 per share, it was selling at a price to book ratio of about 0.75. Which was to me a rather cheap price. So i bought some shares and hope to unload and sell when the market revise its opinion on CFC and value it at its historical premium to book.

Then BAC took an interest in buying out CFC in May earlier this year at for a stock for stock deal which values CFC stocks at around $6 (as of closing date). As of the last quarter 10k report, book value per share of CFC is about $23 per share. So CFC sold itself to BAC at about 0.27 times book value, and i still think that they sold themselves cheap.

Lessons Learnt
1. A stock that is cheap can get cheaper, and outside passive minority shareholder have to accept whatever deals management suggests.

2. In a crises, weaker companies gets gobbled by stronger ones. Stay with the stronger company.
3. Insider may have different incentive as compared to outside shareholders. CEO of CFC, Angelo Mozilo helped sell the company he has built and got a nice severance package along with it as shareholder value gets destroyed.

4. Don't follow blindly. Part of the reason for purchase was that investors such as Wally Weitz and Bill Miller started loading up on CFC in 2007. Wally sold off his shares as of 4th quarter 2007 as he believes that the mortgage crises will hit CFC harder than he thought it would. No managers will tell you when they sell. So please don't buy when they buy. haha, how simple to know what to do yet so hard to follow your own advise.

5. Historical valuation in terms of shorthand like PB or PE tells us little about value.

6. and once again, value can be ignored in the short run but for quite an extended period of time. Have patience.

7. Rectify mistakes as early as possible. I realise that i should not own CFC when i did not wish to average down as the stock price fall as i did not have confidence in the management team of the company. That's when i should have sold. This contrast markedly with American Express and JPMorgan which i happily averaged down my purchase price as i have huge confidence in the company and the management.

Bank of America - haha, forced to acquire this company that Xin Hong loves. Gotta dig his brains for a concise overview of the competitive strength of the bank. At a PB of 0.72 and PE of 9, this acquirer sounds cheap to me. my reasoning sounds all to familiar 9 (see pt 1 & 5) ...darn...old habits die hard.