The problem with certain kinds of problems is that you don't know how big the problem might get. To paraphrase our defense secretary: There are things you know you don't know: known unknowns. And then there are unknown things you don't know that you don't know. Unknown unknowns, if you will.
(Whoa. Sooo dizzy... )
While everyone else made fun of Mr. Rumsfeld when he explained this, I knew exactly what he was talking about. In investing, it's the unknown unknowns that really clobber you, because, more often than not, the known unknowns are already priced into a stock.
That's why the scant drop in the stock of OfficeMax (NYSE:OMX) this morning is so interesting. Under normal circumstances, a big charge that completely erases an already thin first-quarter profit would send a stock reeling. But not so for OfficeMax today. The former timber baron (Boise Cascade) turned Staples (NASDAQ:SPLS) wanna-be announced that it was setting aside $9.8 million as a legal reserve to deal with an unspecified dispute. That will turn the just-reported profit of $0.02 per share into negative-$0.07 a stub.
So, the question becomes: Is this a known unknown related to recent accounting "irregularities," which would explain the market's yawn? It doesn't look like it. That stuff centers on events during 2004. This is to cover something that came up in 2003.
But what? Inquiring minds will just have to guess. A glance at the ever-fascinating "legal proceedings" section of the 10-K suggests that the trouble could be from issues relating to claims under a hazardous-substances statute known as the Comprehensive Environmental Response, Compensation, and Liability Act, or from one of several unnamed asbestos-related claims.
So, the question remains: Known unknown, or unknown unknown? Is this the end of the unspecified legal fracas? How deep does the rabbit hole go? And why would investors trust their bucks to a company that continues to keep a lid on key information while trying to recover from an accounting scandal?
For related Foolishness:
- Read about Mini-Me and OfficeMax. Oh, wait, that's minimizing OfficeMax.
- See who got the ax at OfficeMax.
Seth Jayson will stick with cuneiform, thank you. At the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.
