Failures and Side Effects

Sometimes taking a few steps back can be very interesting to get a perspective of things.

Things are not always what it seems, and if we are not careful, we may even throw the baby out with the bath water!

Failure

Have you ever used the 3M’s Post-it note pads? 

When it was first invented, it was considered a “failure” as what do you do with a “weak” glue that don’t stick? It took 6 years later before a colleague of the inventor found a use for it by anchoring a bookmark to his hymnbook. The rest as they say is history…

Does a Rights Issue sound like the 3M Post-it note?

Most shareholders will moan and groan whenever a rights issue is declared (me included).

I guess most minority shareholders are only fair-weather friends. We will stick around when the company is giving away dividends or rewarding us with capital gains. But when the company has fallen on hard times and need our support with a rights issue, you should read the vitriol we hurl on the management… Ah! Take is easy. Give? Wait long long!

For savvy investors, some rights issue can be an opportunity to increase your percentage share of the company by buying over the rights from other shareholders who are dumping them in dismay. 

The catch word is why you are invested in this company in the first place? If a company you have conviction in is being offered to you at a discount, shouldn’t you be happy? No?

Of course it’s another story if the reasons you invested are no longer valid.

For traders, sometimes there’s a window of arbitrage to make a quick buck off “newbies” who have no clue what are rights offer and how to calculate the Theoretical Ex-Rights Price (TERP). 

It’s weird, but we do see cases where the rights (rights market price plus conversion price) being sold below the mother shares’ price!? A quick fingered trader can sell the mother share and buy the rights and arbitrage on the difference. This is the closest thing next to picking money off the floor…   

It brings to mind the Chinese word for “danger” - 危机. Opportunity in adversity!


Side Effect

I guess the most famous unintended side effect for a drug must go that little blue pill – Viagra!

Originally, Viagra was developed as a cardiovascular drug and for its ability to lower blood pressure. But during the medical trials, the researchers found that the men guinea pigs didn't want to give the medication back because of the side effect of having erections that were harder, firmer and lasted longer. I wouldn’t too! (Did I just say it out loud?)

Remember Hyflux preference shares?

I made the mistake of focusing at it as a pure yield play. But the pleasant side effect was very evident during the market correction during 2^nd half of 2011. 

While Hyflux mother shares fell from SGD $2.19, together with most of the rest of SGX stocks, the Hyflux preference held its ground.

Savvy investors who parked their funds with Hyflux preference shares can leisurely rotate out of the preference shares and buy-in to the Hyflux mother shares at a great discounted price from SGD $1.00 to $1.50.   

I now have another “vehicle” to ride besides going to money market funds or short term treasuries – if I do see rain clouds over the horizon.

Hey! Past performance is no guarantee of future performance! 

Unless you have Viagra (snigger, snigger). What? I’m middle-aged, so it’s probably downhill from here onwards…