Rational Advisor

I got an interesting question from an advisor today, all excited about buying or receiving stock in an new company, as opposed to the old company that they held before. The new company is a prt of the old company

I was a bit confused about the excitement level, and when things sound too good, my spider sense comes into play.

Here’s how I explained it, and you may want to take heed when trying to understand new issues of stocks based on old issuing companies

For this example I will use GM

The old GM went into bankruptcy, mainly because it’s dealership, products, costs, interest and benefits payments were wayyy too much. Also previous management did a terrible job.

So old GM was out, and then the Government (call them BIG person - one of the biggest in the industry - get my drift) takes over the company. Now they have put assets and monies into this company, substantial amount, although it is a rounding error in the larger amount of money that they have. BIG owner now takes over 100% control, old management ios out, although may linger on for awhile.

Now BIG owner does not want it’s money stiuck in this company that is going to have a tough time getting revenues up, so what do they do? in a couple of months, they issue stock to the public in new GM, based on its new models coming out - new GM will be launching ten new models in the next 18 months. Lots of razzamataz.

And the publc will be buying these new GM shares, why? because its now a new entity, backed by a BIG partner, and does not have the handcuffs of the old GM. it’s based on a better revenue model etc, and people are all a buzz about how they better get in on this on the ground floor. Meanwhile BIG partner gets the money they put in back from the buyers of new GM shares, but BIG partner keeps major owenership. So in a few months, they get their money back plus they get future revenue streams, if any, and who gets stuck with the stock the general public. And all because they forgot to read the details.

This is what happens when people get excited about a story of some future share offering, without understanding the maths. Before you make any decision on purchases or receipt of stocks understand the maths.

A company does not issue stock for no reason, it does not want to give up future revenue stream, unless they can get it for FREE. Or, they will issue new stock because they are in trouble. But, never do they issue new stock for the benefit of mankind!

A good idea is to look at the track record of the BIG partner in purchases they have done in the past, have they improved those companies, has management been improved, did they change things for the better. Companies do not change their stripes so easily. A corporate pattern stays around… pay attention to it..

Measure twice cut once. Don’t get carried away.