He took my advice and sold his shares at a small loss. But he can be glad he took my advice as shares of most subprime lenders have fallen dramatically since-far more than the overall stock averages.
The case of American Home Mortgage serves as an illustration of just how high the risk is. Its shares fell a full 87.4% today (This from a level more than 70% lower than in December 2006), after news that it can no longer fund its home loans. This means that there is a very high risk that the company will go bankrupt or is forced to some other solution which would basically wipe out shareholder value. By now, the stock is a mere lottery ticket given the high risk of failure-and the potentially extremely high returns in the unlikely event that shareholder value will somehow be preserved. I still think the worst has yet to come, so I still wouldn't recommend anyone to buy stocks of subprime lenders unless it is one of particularly sound business practices compared to others-or unless you want a substitute for regular lottery tickets.