Rule No. 4: Buy Damaged Stocks, Not Damaged Companies
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Let's say Wall Street is holding a sale of solid merchandise that it has to move. And let's say you take that merchandise home only to find it doesn't work, has a hole in it or is missing a key part. If we were on Main Street, of course, it wouldn't matter. There are guarantees and warranties galore on Main Street. You can take anything back.
You can't return merchandise on Wall Street and get your money back. Nope, no way.Which is why I always say:
You have to buy damaged stocks, not damaged companies.Sometimes these buys are easy to discern. In 1998, when Cendant (CD) was defrauded by the management of CUC International through a series of bogus financials, the stock went from $36 to $12 in pretty much a straight line. Was that a one-day sale that should be bought? No, that was a damaged company. It took years for Cendant to work its way back into the hearts of investors. Some say it has never recovered.
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