Last week’s question and answer

I came to life in 1946, starting in a corner of a Tokyo department store. In my early days, I repaired radios and made items such as radio shortwave converters and electric rice cookers. Today I’m one of the world’s top consumer electronics firms, listed on 16 stock exchanges and with 913 consolidated subsidiaries worldwide. You’ll find more than children playing at my stations and not just men walking with me. I also lead in motion picture and television production and in recorded music. I rake in more than $70 billion annually and employ 160,000 people. With some partners, I recently bought Metro-Goldwyn-Mayer. Who am I? (Answer: Sony Corp.)

Plucked by chicken

Boston Chicken (later, Boston Market) was the first stock I ever bought. You could argue that buying this before they went bankrupt was a boneheaded move, but I took it one step further. By the time I decided to invest, Boston Chicken had already gone bankrupt. Under the “Boston Chicken is tasty, so once it reorganizes, the stock is bound to go up” school of thought, I bought about $200 worth at around 70 cents per share. Unfortunately, since I did zero research, I was not aware that the stock was of a type that would go completely out of existence once reorganization was complete. Once I found this out I sold. My proceeds totaled about $24, of which $19.99 went to my broker. At least I didn’t lose much, and I learned the lesson that an investment decision should be based on more than the tastiness of a quarter-chicken, white-meat meal. – Brett, Austin, Texas

The Fool Responds: Many people are enticed by seemingly low stock prices, not realizing that they can get much lower. McDonald’s eventually bought the Boston Market chain.

Grave profits

Companies in the underfollowed death care industry can count on one thing: There always will be deaths. Thus, they’re likely to be steady, recession-proof growers for a very long time.

Take Stewart Enterprises (Nasdaq: STEI), for example. It’s one of four large public companies operating in death care. It’s ranked third in terms of sales, after Service Corp. (NYSE: SCI) and Alderwoods Group (Nasdaq: AWGI) and before Carriage Services (NYSE: CSV). Stewart traces its roots back to 1910 and currently operates 234 funeral homes and 145 cemeteries.

Stewart recently reported second-quarter revenues up an uninspiring 4.2 percent, expenses up almost 8 percent and a loss of 4 cents per share. Things aren’t as bad as they seem, though. Reported expenses look high because of two accounting changes. Adjusting for this, gross profit margin is up 7 percent.

The reported loss was caused by a $30 million charge the company took to pay down some of its high-interest debt. This is a good use of capital, reducing future interest expenses.

At its current valuation, Stewart has more than enough earnings power and revenue growth to outperform the market. This depends, however, on management’s continuing focus on shareholder value. Wisely, it is already paying a dividend (of around 1.6 percent) and buying back some of its stock.

With companies in the industry so unloved, Stewart, trading below its book value, is worth a look.

Stop renting, start owning

Whereas home renters pay significant sums month after month with little to show for it, homeowners are building equity in something with lasting value. (Of course, in some situations, renting does make sense, such as if you’re not going to stay in one place very long and the real estate market is overpriced.)

It’s also good to stop renting and start owning when it comes to the stock market. How can you rent stocks? Well, by buying and selling them rapidly and by not holding them very long. Such behavior is speculation, not investing. You’re betting on the direction in which a stock soon will move, when it’s impossible to consistently know what stocks will do in the short run.

A share of stock represents a real chunk of a real company. If you’re a shareholder, you’re a part owner of the firm. Owners tend to do well when they focus on the long-term success of their company.

Here’s some evidence. Two finance professors, Terrance Odean and Brad Barber, studied the trading records of more than 66,000 individual investor accounts from 1991 to 1996, sorting them into five groups based upon trading frequency. They found that the least active group averaged just 1.44 percent turnover per year. This means that if the average investor in this group held 15 stocks, one stock would be replaced from the portfolio roughly every five years. The highest turnover group averaged 283 percent annual turnover, meaning that these investors swapped out their entire portfolios almost three times annually.

Odean and Barber found that the most active group trailed the least active group in performance by an average of more than 5 percent points per year. And this doesn’t even consider the effect of taxes, which were surely significant. (Short-term gains are taxed at ordinary income tax rates, which can top 30 percent, while gains from stocks held a year or more are generally taxed at 5 percent or 15 percent.)

When investing, find strong, growing companies in which you have long-term confidence – and then plan to hang on for a while.

Tax loss

If I have a big loss from a stock sale this year, can I deduct it from my income? – T.H., Santa Rosa, Calif.

If you have a net loss after offsetting any capital gains with any losses, you can deduct the amount of the loss from your income – up to $3,000 per year. If your loss exceeds $3,000, you can carry over the remainder to the following year.

If you’re in the 25 percent bracket and you deduct $3,000 from your income, you’re excluding that amount from taxation. So you save 25 percent of $3,000, or $750. Of course, in a sense, you haven’t really saved anything – you’ve still lost money. You just decreased your loss.

Will I lose my entire investment if I hold stock in a company that goes bankrupt? – B.N., Dover, N.H.

You’ll probably take a significant hit, but you won’t necessarily lose everything. Some companies file for bankruptcy protection and then turn themselves around, as Texaco did long ago. Even if a firm ultimately fails, it’s sometimes still worth something. Its assets (such as buildings or equipment or business units) may be sold off, generating some money. The whole company may be bought by another company, too.

When these sales occur, you as a shareholder are in line to receive some of the proceeds. Unfortunately, though, you’re last in line. Creditors are paid first (banks, bondholders, suppliers, etc.), followed by holders of preferred stock. If there’s anything left at this point, holders of common stock may receive something. Don’t count on it, though.