Bystanders & Collateral Damage

Drama. We raised this point in our recent Post and Deal Book on the proposed Valeant acquisition of Actavis in an all stock deal (please see, (B)(N) VRX Valeant Pharmaceuticals International, April 2013) and a lot of you are pretty excited about it, judging by the hits on RiskWerk this morning, from thirty countries, and many in the 3rd world which keeps different hours from us.

It’s the beginning of a song that we sing at The RiskWerk Company and it goes like this:

If you don’t know the price of risk,
then you don’t know anything about the stock price (Goetze 2009).

That’s hard to sing for most investors in the major markets because they don’t know the words, “the” – “price” – “of” – “risk”. Moreover, The RiskWerk Company has a “lock” on it, and is mum, at least for the way in which we calculate it, but we also think that there are other ways in which to calculate something that is just as good, or just as effective, depending on its purpose, and we’ve shown how such a thing can be discovered and tested. Please see our Posts on The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, and Earnings Don’t Matter, April 2013, and the “practice”, The Wall Street Put, April 2013. On the plus side, The RiskWerk Company does provide the “major lift” – earn while you learn – for serious players. Please see our Post, The RiskWerk Company Training Programme, October 2012.

In our view, the Valeant offer for Actavis was correctly and rightly scorned because if Valeant had known the price of risk, then the deal would have been pitched as a merger of equals, with new opportunities for both companies, rather than an acquisition of the “big fish eats smaller one” variety, a concept that is hard to swallow for a company that has made more than twenty acquisitions in the last three years, and that pays no dividends and has negligible to negative earnings to show for it, but a stock price that has gained +50% in the last year and +30% since December. Moreover, Actavis itself was created on the acquisition trail and is now the world’s third largest generic pharma company, after Teva and the Sandoz unit of Novartis, and it too pays no dividends and has negligible earnings to show for it, but a stock price that is also up +60% in the last year and +20% since December.

We don’t question the “stock price” – Bravo! we say, it is revealed by the efforts tens of thousands of investors who are buying and selling the stocks in large quantities every day – but the foundation is the price of risk and, generally, they don’t know what it is, or what it means, or that it even exists, and so, they are figuratively walking, or running, to work every day and at home at night, after another hard day of “wishing” but no reason to “hope” because they don’t know where they are. Tomorrow is just another day of waiting, wishing, and hoping for more news and more volatility. Please see our Post, Guts, Glory, And A Good Story, April 2013.

It’s Not A Game Of Chance

The “price of risk” is calculated for only one purpose – to banish “investment risk” by knowing what it is and where it is – because we make investments not to have a better chance of losing our money, but of keeping it and obtaining a hopeful, but not necessarily guaranteed, return above the rate of inflation.

In our view, there are only three types of investors: “risk taking” investors who are willing and can afford to accept a possibly negative real rate of return in the hope of excess real rates of return, that is, above the rate of inflation; and “risk averse” investors who also hope for a positive real rate of return but will not or cannot accept a negative one, and are aware of that; and the others, those who are proactively neither “risk taking” nor “risk averse” and may be called “gamblers”, or “reckless”, because they don’t really know what they want and will take what they get, even if it ruins them.

Another way to think about the “risk price” is that it is the “Gold Standard” because all stocks that are priced at their “price of risk” have the same defining characteristic – the stock is as good as, if not better than, cash because there is the reasonable expectation of 100% capital safety and therefore, a zero or better real rate of return on it, and it is also the “least stock price” at which that presumption can be demonstrated (Goetze 2009). In those terms, because Valeant and Actavis have the same value at their price of risk (please see our previous Post), the “currency” that is represented by Actavis stock is a better currency than that of Valeant because $1 of Actavis stock at the market price is “worth” $22 billion/$13 billion = $1.69 of Valeant stock at the market price.

In the jargon of economics, stock prices above the price of risk are an “economic free good” and a battleground that is a common ground for all three “types” of investors; the extent to which that price is maintained with lower ambient volatility signals a victory for “risk averse” investors, and a win for “risk takers”, and “whatever” for the “gamblers” who are, in effect, no better than bystanders and “collateral damage” because they don’t know the price of risk.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.