Unlikely Wisdom from the Message Boards

New Century Financial (NEW) is an American subprime mortgage lender. It lends money to high-risk borrowers... first-time buyers... low-income families... and folks with bad credit histories.
 
Unfortunately, New Century has been careless about whom it lent money. And it didn't worry about the true value of the houses it lent money against. It was an easy mistake to make. The American housing market was booming, the economy was strong, and New Century was minting money with each new loan origination.

Late last year, the ball unraveled. The housing market started falling and many of New Century's debtors decided they couldn't make their mortgage payments.

In the last six weeks, New Century Financial's share price has fallen from $30 to $3. Yesterday, trading was halted on the NYSE, pending more news. In other words, it's about to go bankrupt.

I spent the weekend surfing the Yahoo! Message boards for New Century Financial. I always find the message board for troubled companies to be a fantastic source of investment wisdom. Here are some examples:

"I've lost my entire life savings... $33,000... does anyone know a good lawyer. I'm suing these bastards. Some motherf**ker has to pay for this." 

Lesson No. 2: The next time I lose money on an investment, I will blame myself. Blaming other people is a waste of emotional capital. And it doesn't help me learn. Even in a fraud situation, it's my fault. Fraud happens all the time. I ought to be aware of it. 

"The way I look at NEW is that when I bought at $5 I was getting it on a 90% off sale. If you went to the mall and saw a sign '90% OFF TODAY ONLY!' would you run out of the mall screaming? I don't think so."

Lesson No. 3: Value and price are not the same. New Century Financial has no value. In fact, given its huge debts, it's probably worth negative-$10 billion. Even at $5 a share, it's still massively overvalued. (It traded for $65 last year.)

On the other hand, I'm reminded of the story of Tom Barrack and the Fukuoka Dome stadium in Japan. Barrack invested when he noticed that the titanium in the retractable roof was worth more than the purchase price of the stadium. He knew he was buying value. He knew his downside was limited.

"I got in at high price when it crashed, but it was still too high. Then I got a lot more when it was $4.45 last week. So even down today, I am not losing much. $4.60 is a good bargain."

Lesson No. 4: Cut the losses. Even if a stock falls from $40 to $4, it can easily go to zero. By cutting your losses with a simple trailing stop, you never have to be in this situation again. Buying more on the way down is not a way to pick up a great bargain... it's a way to magnify your losses.

I love the message boards. Most serious investors hate them. The trick is, don't take them seriously and you just might learn something...