Vladimir Senkov

Why I Bought AIG Last Week

Brian, all stocks have always been essentially call options on company future profits if company is to be evaluated as a going concern. Alternatively, if you look at company's liquidation value, you might need to look at asset to debt ratio, etc. In most cases debt holders have no incentive to force a liquidation if there is any residual value after the debt is paid back, so in most cases common stock is worthless in liquidation scenario, so in most cases stock really should be valued as a call options on future profits.

Why I Bought AIG Last Week

I often hear people talking about "cheap" stocks and they often mention the "book value". Do you understand exactly what the book value means? Do you know that folks are happy to get 22 cents on the dollar for some of the assets that they could actually sell? Do you know how much they would be able to get for the ones they could not sell? 0? Suppose they could sell all at 22 cents on the dollar. Think about this as the "best case scenario". Your 5.80 at the end of the last qtr quickly becomes under 1.28.
Another thing you have to remember is that book value, as irrelevant as it is at the moment matters only if you are trying to look at the liquidation value of the company. Why are you looking at AIG from liquidation point of view if you already know that the gov. essentially told you that AIG isn't subject to a liquidation?
So forget about book value and look at AIG as a going concern.
What do the earnings look like now and how are they going to look like in the future? What would be left after the massive debt is serviced? My guess is nothing. Why? Because there is no reason for anything to be left. Financing they are getting at the moment is not an attempt to develop a stable source of income. It is what's necessary to keep it afloat, because some believe "it has to stay afloat". Those who gave it money already have stable stream of income, it's called taxes.