Monday, March 04, 2013

Investing In A Relisted Stock?

  • "We study the past to understand the present; we understand the present to guide the future." -- William Lund.

Think about it.

In terms of the stock market, we need to study/understand the stock past. The stock history's tells us what has happened to the stock before and what had happened before could happen once again in the future.

An investor invests for the long term. The long term gives the investor the edge and allow the investor to reap the benefits of seeing the investment grow over time. The time factor is crucial.

However, what if.

What if the time factor turns out to be a risk?

For example, is it a good idea to invest in a stock which had been relisted again?

Think about it.

We are seen many companies whose stock was taken private cheaply in the past getting relisted once more. These companies have turned the stock market into their own playground where they can list and delist their stocks based on their own fancy.

That is the stock past.

The risk, of course, is the delisting could happen again in the future.. In such case, the time factor becomes a risk. The longer time the stock is listed, the greater the chance the stock could be taken private if the stock is trading cheaply.

You invest in Kow Kow stock at 2.00, which is a 10% discount over its relisting IPO price. Five years later, a crisis could happen to the stock market causing Kow Kow to trade at 1.20.

Yes, in most cases, when the stock trades at super low valuations, funds would come in and invest the stock. That's the mechanism of the stock market. Stock prices come up and they do come down. The problem is the owners see the cheap valuation too. Instead of implementing company stock buybacks, the owner do a private buyback. They buy back these shares but via a privatisation offer, benefiting themselves and not the minority shareholders. So the owner launches a privatisation bid at 1.56, which is a so-called impressive 30% premium over the stock price. But what good is such a premium to Kow Kow stock investor who had bought the stock at 2.00?

The investor can mount an outrage and then hope and pray that the privatisation bid fails.

But what good would it do?

Wouldn't it be better if the stock had taken the prevention is better than cure route?

Know the stock past. Don't let the stock past hurt us. Don't let a company who is a chronic privatisor fool you and your money.

Protect yourself is always much better than hope others to protect you.