In Praise of the Ignorant: Investor ignorance is an integral and important part of the investment business. Without uninformed participants in the “zero sum” game of investing there would be no profits on the other side of the trade.
So, as we embark upon a new year, we should pay tribute to those individuals who sacrifice their money on other’s behalf in the year just past.
2010 Investor Stupidity Award: Each year, in an effort to facilitate the transfer of wealth from the uninformed investors to those investors who may prey upon them, Joe Eqcome selects a single company whose stock price is so vastly overvalued that prospective investors in the coming year are almost sure to lose money. It is the equivalent of the “Darwin Awards” for investing.
An Important Distinction: It is important to make a distinction between investment ignorance and stupidity. Fortunately, ignorance is a temporary phenomenon. It is something from which an investor can recover. Stupidity is the cultivation of ignorance and is terminal. So, this article is really addressed to the later group and for whom the Award has been established.
Key Criterion: The key criterion for the Award’s recipient is to ignore a compelling set of negative facts and in the face of that fact-set buy the stock in question anyway.
2010 Winner: So, here is the following set of facts regarding Cornerstone Progressive Return Fund (CFP) which you must ignore on a wholesale basis in order to buy the stock and be eligible for the Award.
1. There is no fundamental case for its current valuation, i.e., no one has advanced a case why a closely-held, micro cap stock, which its largest inside investor is dumping, should be trading at a 41% premium when it is effectively in the process of liquidating itself through the current distribution of 28% of its capital in the form of monthly distributions. At its current distribution rate it will be liquidated in 3.5 years.
2. Its largest shareholder appears to be systematically bailing out of its stock. It has already sold 4.3 million shares in the past six months (approximately half CFP’s outstanding shares) and has an additional 5 million shares to liquidate.
3. According to estimates, the cost basis per share of the major shareholders are between $9.50 and $10.50 per share and so supporting the stock at current valuation would facilitate a liquidation value that would minimize losses. Therefore, they need new shareholders—like you—to buy the stock from them at a premium.
4. The major shareholder may have distributed its holdings to other accounts which may allow these smaller accounts to come under the “radar” screen with regards to SEC trading reports. Current trading may be no more than “swapping spit” between accounts.
5. There seems to be small-lot buying after large trades on downticks and at the close and in the aftermarket. (However, only a detail trading audit by a government agency and/or an exchange that is responsible for maintaining a level playing field for the investing public can validate this observation. This seems like an “easy box to check”. To reverse an idiomatic expression: No foul, no harm.)
6. Lastly, to be a current buyer of the stock you’d have to subscribe to the “greater fool theory of investing”, covering your “short” at higher prices or being a recipient of the Joe Eqcome 2010 Investor Stupidity Award.
Help with Locating Award Recipients: For anyone who knows a current shareholder of CFP, please pass along this article to them so they can be in possession of “Award” above. Numbered certificates are available as a collector’s item.
Parting Comments: My mission statement is to provide independent analysis for the retail investors who appear to have no independent advocate in the CEF market segment. While there may be other CEFs that qualify, CFP appears to be of no investment value other than for the major shareholder(s) who are foisting its shares on the unsuspecting public.
So, to eliminate any conflict of interest in this analysis, I have no current and contemplate no future investment interest in CFP. I recommend that owners of CFP sell their stock and potential buyers not to purchase it. I do not recommend retail investors “short” the stock. This is a job for hedge funds.
Not since the dot.com bubble have I seen a valuation both so curious and vacuous. Like the burst of the dot.com bubble, extreme high premium CEFs are readying for a correction—and CFP may end-up being an exhibit for one in future business school case studies.
I believe I’ve relieved my obligation to “out” this investment to my fellow retail investors. I do not intend to “rag” on it anymore. You have been duly warned.
Disclosure: To Avoid Conflict of Interest, No Current or Future Comtemplated Position in CFP