Last week, when the big East Coast storm dumped on us, travel was so difficult that some employees chose to stay home, leaving me to handle a few more phone calls than usual. One was from a reader named Willie, who said he needed some help deciding which of our investment advisory newsletters to subscribe to. He said, “My wife and I are both retired, so I have the time to do it. And the guys who were managing my account before did a horrible job. I just need to know how to get started.”

Here’s what I told him.

First, you need a broker. Charles Schwab and Fidelity are tops among the discount brokers, as you can always get a human to talk to. But if you really want to pinch pennies, I suggest you look at Scottrade, TD Ameritrade and optionsXpress.

Then I suggest you choose either Cabot Stock of the Month Report or Cabot Market Letter. Cabot Stock of the Month Report’s main advantage is that it is very affordable, only $49 for the first year. And it’s very focused, recommending only one stock per month. Cabot Market Letter, on the other hand, costs $99 for the first year, but you get a lot more. Issues arrive every two weeks, and include expert market timing, education (we teach you what actually works in the market, not what the pundits think works) and portfolio management, as well as stock selection, with maybe 10 stocks discussed in an average issue. Cabot Market Letter is our flagship publication, and the very best choice for new investors who want a trusted guide to the stock market.

Willie processed all that and said he’d review the information on our Web site … and then he asked another question.

“What do you think about AIG?”

I replied, “You don’t own it, right?”

He answered, “Right, but it’s down to 49.”

So I quickly pulled up a chart, saw the stock trading at 49 CENTS, and launched into an explanation that was probably longer than Willie expected. But the fallacy of buying has-been stocks when they’re dirt-cheap is one of my favorite topics, so here’s my opinion on AIG (and similar stocks) for you as well.

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First, every investor and everyone in business in America knows AIG (American International Group). A few years ago, it was one of the market’s favorite stocks, owned by more than a thousand mutual funds. But in the past year, the news has been all bad, and the professional managers of those funds have been selling their stock. Trouble is it’s a lot of stock, some 600 million shares, and every time they’ve sold some (in general) they’ve had to accept a price that’s a little lower.

In the early months of the downturn, some of these professionals were taking profits. But now, with the stock lower than it’s been in thirty years, they’ve all been taking losses.

Furthermore, every time they sold on the way down, there was a buyer, who was buying “low” and fully expecting that the stock would reverse course and head higher, making his investment look very smart. But every one of those buyers has been proved wrong and now has a loss. So many of them have sold … to new buyers who have the same ideas about buying low … trying to pick the bottom.

The main message here is this: Trends tend to persist longer and go further than most investors expect. In the case of downtrends, the more loved and more heavily owned a stock, the longer it takes for investors to unwind those positions and the further the stock will fall.

Or, as the old maxim goes, the bigger they are, the harder they fall.

For the record, AIG was the 18th largest company in the world last year. But on March 2, 2009, the company reported a fourth quarter loss of $61.7 billion, the largest quarterly loss in corporate history. Now, you can argue that the stock is undervalued now, and you may be right. It may well have been undervalued back in February, too, when it was still trading for more than a dollar. Just because a stock is a good value doesn’t mean it can’t go lower.

Another message to take from the decline of AIG is this: When you’re venturing to invest in a company that’s very well known, you know less than the professional investors in that stock. So unless all trends are in your favor, you probably shouldn’t do it.

As to the future of AIG, I hope management can stabilize its business and return to being a creator of jobs and wealth. But hope is not an investment strategy. I choose not to invest in AIG because the trend is down and because I know I have no informational advantage. Furthermore, there is too much about the company that is unknown (such as the real value of its debt and derivatives), and not in the company’s control. The same goes for General Motors, Citigroup, Bank of America and every other over-owned stock that’s on the skids.