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  • Why I Don't Care What The Stock Market Does

    It never ceases to amaze just how much time, effort and anxiety investors devote to the futile effort of trying to predict the future. Predicting the future is not possible, and therefore, it is irrational to try. It doesn't matter if we're talking about the future of stock prices or anything else. If it hasn't happened yet, you cannot know how it will happen.

    Moreover, if you are an investor, it doesn't matter if the stock market goes up or down. Suppose you own ten shares of General Electric (NYSE:GE). If the stock price doubles or falls by 50%, you haven't made or lost money. You still own the same ten shares of GE, and still own the same percentage of GE's profits as you did before. If GE's profits go up or down, THAT is when you can say that you've made money (you can only lose money if GE posts losses instead of profits).

    The numbers you see in your brokerage statement each month tell you absolutely nothing about how much money you have - the reason why is that stocks are not money, and the price of stocks tells you little to nothing (in the short term) about the profits that your companies are earning for you.

    As it happens, I own shares of GE. I like to imagine that GE is a private company. It's earning profits, keeping some to reinvest in the business, paying some to me, and I can say without a doubt that GE is making me money. If the village idiot comes up to me and says "I will buy your shares in GE for half what you paid", does that mean I have suddenly lost half my investment? Of course not! I tell the village idiot to go stuff it, and keep on happily collecting my dividend checks. I don't care if it is one village idiot or an entire chorus of village idiots. I don't care if it's a chorus of village geniuses offering to buy my shares in GE at half off. GE is earning money for me, and I am not selling. In fact, the only time I even care what the chorus of village idiots or geniuses is offering me is when they offer me a price for GE shares that is unreasonably high, something far far far above the value of profits GE is earning for me or is ever likely to earn for me in the next twenty years. Until that day comes, there is nothing that the chorus of village idiots can tell me that I care to hear.

    Another word for "chorus of idiots" is "the stock market." If you own stock, you are a business owner, and the money your business earns for you is the only thing that determines whether you are making or losing money on your investment. You won't find that information looking at the bottom of a brokerage statement, and since you won't, there is no reason to even look at the bottom of your brokerage statement. And it is simply irrational to try and guess what that number will be in the future.

    Disclosure: The author is long GE.

    Jul 13 9:13 AM | Link | 4 Comments
  • Is Today's Sell Off In Apollo Investments Overdone?
    There are at least five reasons why Apollo Investment Corp. (ticker symbol AINV) shed nearly 11% today. First, the company trimmed it's dividend from 28 cents per share down to 20 cents per share - not unexpected given that recent dividends have exceeded net income per share. Second, Fitch Ratings downgraded the company from stable to negative. Third, the company announced that it is considering diluting existing shareholders by raising additional capital of $200 million. Forth, management announced that they will broaden their investment exposure beyond market segments in which the company has niche expertise. Fifth, the company announced an extensive shake up of senior management.

    The question is whether those developments warrant the 11% drubbing the market awarded the company today for it's performance? To answer that, you have to step back and consider the fact that like any business development company, AINV is something like a closed-end mutual fund in the sense that what the company is, simply put, is a pile of money that management lends and invests in other companies, passing the net income out to taxpayers. Because of this mutual fund-like business model, business development companies often tend to trade close to their net asset value, as is the case today with several of Apollo's competitors. AINV, however, now trades at nearly a 14% discount to NAV as of today's market close, which is unusual for the stock in particular and for business development companies in general.

    So does that make AINV a bargain? Not necessarily, and the reason why has to do with the company's surprise announcement that they were considering raising new capital, and the reaction of Fitch Ratings.

    Think it through. As a shareholder, would you rather own 2% of a business development company with $1m in assets, or 1% of a business development company with $2m in assets? Considering the mutual fund-like business model of a business development company, a shareholder really ought to be indifferent to dilution, PROVIDED, however, that the company is able to raise new capital without taking a valuation discount on the newly issued shares in the process.

    And that's quite likely the reason for the 14% discount to NAV and the 11% plunge that took the company there today. The market may be pricing in a risk that the company is not in a position to raise new capital on a dollar-for-dollar basis. If not, then existing shareholders would see their percentage stake in the company drop without an equal and offsetting increase in the company's capital base. And that is precisely one of the concerns Fitch articulated in it's press release today as to why they were downgrading their outlook for AINV.

    So the question for shareholders is not simply whether an 11% stock price decline is overdone, or even whether a 14% discount to NAV represents a bargain entry point. Instead, it probably makes more sense for an investor to ask whether the market has correctly priced in the likelihood and extent that AINV's existing shareholders will see their stake in the company sold to new investors at bargain levels.

    Disclosure: I am long AINV.

    Additional disclosure: I am not an investment advisor, and nothing contained in this article should be considered, or relied upon, as advice as to any particular investment, or any particular investment approach, or as a guarantee or endorsement of any statement of fact, whether contained in this article or referenced in any quarterly statement or news release issued by AINV, Fitch, or any other company or individual.

    Feb 08 8:36 PM | Link | Comment!
  • This proves CAPM is wrong.
    The so-called "risk free rate of return" governs the pricing of every asset on Earth. And throughout recent history, capital markets assume that this "risk free rate of return" is that of US Treasuries. And so, with Friday's downgrade of US Treasuries, standard financial asset pricing models imply that all assets - stocks, bonds, you name it - are now riskier, and prices should adjust lower to compensate investors for that extra risk.

    The problem is that this model is fundamentally flawed. US Treasuries may now be riskier, but this says nothing about whether GE is now more likely to default on its bonds, or that McDonalds is likelier to slash its dividend. If anything, with Treasuries having now been declared riskier, and thus, less appealing as investments, stocks and corporate bonds ought to rally if anything else, because the prospects for corporate issuers of stocks and bonds have are still stable, while the prospects for "risk free" assets have deterioriated.

    Whether the market will see it this way is doubtful. 
    Aug 06 8:21 AM | Link | 1 Comment
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