Legg Mason not immune to financial-sector woes

How tough is this market for financial companies? Tough enough that Legg Mason (NYSE: LM) posted its first quarterly loss ($255.5 million) in 25 years. Revenue was down, too, off 6.5 percent year over year.

Two key problems killed the quarter: a $382.8 million write-down and a whopping 5 percent decrease in assets under management.

Legg Mason announced a plan to raise $1 billion by offering more stock. In doing so, the company becomes the first fund group to raise public capital in order to shore up losses from the credit crisis.

So let’s see what we have here. The asset manager has been forced to write off massive amounts of money resulting from the credit crisis, investors are pulling money out of funds because of lousy performance and the market environment stinks.

Really, though, it’s not all that bad. Legg Mason isn’t alone in this mess; its competitors have also suffered. Also, the market won’t be slumping forever. Legg Mason is a well-run company that has fallen victim to short-term peculiarities of the environment. The factors that negatively affected this quarter should be less prevalent in coming quarters. Given the stock’s roughly 50 percent drop over the past year, the company is looking attractive.

Ask the Fool

Q: What are the “one-time charges against earnings” that I see in company earnings reports? – R.Y., St. Augustine, Fla.

A: They’re meant to reflect out-of-the-ordinary costs a company is bearing (for example, for closing plants, downsizing, writing off bad investments, etc.).

The charges are meant to be removed from the company’s earnings (in other words, their amount is added back), ostensibly to more accurately reflect the firm’s operating performance. Imagine that Meteorite Insurance Inc. (ticker: HEDSUP) earns $10 million in a quarter, but it lays off many employees then, too, incurring significant severance payment costs. If these costs amounted to $2 million and were labeled as one-time charges, then the company would be suggesting that its business really earned $12 million in the quarter.

Q: What’s the S&P 500? – H.W., Seattle

A: It’s an index of 500 of America’s biggest companies, as selected by the folks at Standard & Poor’s. Though the U.S. stock market encompasses thousands of companies, these 500 together make up more than 75 percent of the market’s value.

The companies sport market capitalizations of at least $5 billion, and they include names such as Amazon.com, Anheuser-Busch, Boeing, Campbell Soup, Charles Schwab, Dell, ExxonMobil, FedEx, Ford, General Electric, Google, Harley-Davidson, Halliburton, Heinz, Hershey, Kellogg, Mattel, Merck, Microsoft, Nike, Procter & Gamble, Radio Shack, Southwest Airlines, Target, Whirlpool and Whole Foods Market.

Companies removed from the list in the past year include Circuit City and Hilton Hotels, while those added include the Washington Post Co. and Abercrombie & Fitch.

You can invest in the S&P 500 easily via an index fund such as the low-cost Vanguard 500 Index. Learn more at www.fool.com/mutualfunds/mutualfunds.htm.

My dumbest investment

Learning how to smoke was my dumbest investment ever. My smartest one was learning how to quit and never starting up again. – D.M., California

The Fool Responds: Right you are health issues aside, quitting smoking is a great financial move.

If you spend $5 per day on a pack of cigarettes, that amounts to $1,825 per year. If you took that $1,825 and invested it in the stock market, earning the historical average return of about 10 percent per year, in 30 years, you’d have nearly $32,000 – just from one year of not smoking.

Imagine what you could do with more years of saving and investing. If you invested $1,825 in the market each year for 30 years, earning 10 percent, you’d end up with more than $275,000.

Many of us are not saving and investing enough for retirement, and it can be hard to find ways to scrape together more moolah. Quitting smoking is a far from easy thing to do, but your lungs and your golden years will thank you for it.

For more information on quitting, visit www.surgeongeneral.gov/tobacco.