September 9, 2008 - Every investor would love to own a stock that doesn't have surprises, makes earnings grow every quarter and raises the dividend annually. At least sane investors do. Others go after hope and promises (no profits yet, but coming, we promise) and sleepless nights. This column isn't for them. It's for the ones looking for a stock that doesn't exist.

Now we know different. They haven't failed, but shareholders have a hard time finding solace in shares selling for 85 cents a share, ones they bought at $35 a share last year. Many people will say: serves them right. They took a risk, and it didn't work out. If these two giants had made money, shareholders would have made money as well. No question. In the stock market, you take a risk for the reward.

But these two aren't quite the same as other stocks. There was always the implied government guarantee behind everything they did. They were even called Government Sponsored Enterprises, whatever that means. You can see the confusion that comes from the name. After all, if something says Government Sponsored, you would assume that it's, well, government sponsored.

Surprise! It is government sponsored in certain ways but not in every way. It turns out that the federal government did step in to stop the big lenders from going out of business, but it did so in a unique way: it almost, but not quite, wiped out the equity and the preferred shareholders. They suspended dividends on the common and the preferred stocks. In the future, if there are enough earnings, they will be reinstated, the preferred first, then the common.

So equity and preferred shareholders are left holding something that isn't really fish nor fowl. Yes, they still have equity in the company if they own the common stock but it's almost worthless because the government is going to buy 80% of the common at very low prices. And the preferred holders have an option on a future source of revenues that may or may not happen. So what's that worth? No one knows.

If a GSE (Government Sponsored Enterprise) is allowed to shoot the shareholders, then there is clear evidence that no stock is safe. Most investors already knew this, but some newbies may think differently, may think Enron, MCI, Tyco and even Fannie Mae and Freddie Mac are anamolies, something that their homework wouldn't allow them to invest in. Don't think these are only exceptions. Bad things happen to good companies. Bad things happen to bad companies. There are no safe harbors in the stock market. That's been proven over and over. Never invest in any one stock more than you can afford to lose because you just might. It's the price investors pay for being rewarded when they get it right.

- Ted Allrich