Commentary by Joe Clark
Recently, my partner and chief investment strategist Adam Harter, CFA, greeted me with the question, “Do you want the good news or the bad news?”
We owned a stock that shall remain nameless for SEC compliance. The company was “taken out” over the weekend, meaning that a buyer made a tender offer to the board of directors, offering to purchase all the shares and thus own the company. In such situations, the share price is always higher than the current trading price – often by more than 20 percent.
The “bad” news was that our families would incur short-term capital gains on their tax returns. Yes, this situation is better than a loss, but taxes are painful. When a company is taken out in this manner, investors enjoy the profit and deal with the consequences at tax time.
Discussing the event, a friend remarked that such situations are always good deals because investors always make money. That is not true. Yes, the investors in the “take out” above made more money than they had the day before, but not necessarily more money than they would have earned over the long term.
The company sold at an all-time high, so every investor made money. During my history in the industry, a paper manufacturer got taken out at a 25 percent premium over the previous day’s closing price. Let’s pretend the closing price on Friday was $100 and the tender offer to buy was $125. It’s easy to see why people would consider every investor a “winner.”
We had a friend who worked at the paper company and used most of his retirement savings – against our recommendation – to purchase additional shares. His average share price was near $200, and he was holding indefinitely because he was confident the company and its stock price would recover. The $125 was more than he had on Friday but not near what he had invested. Ouch!
There are many moving parts to the stock market. Every year companies are bought and sold. Expect 2017 to be volatile.
Joseph Clark is a Certified Financial PlannerTM and the Managing Partner of Financial Enhancement Group, LLC an SEC registered Investment Advisor. He is the host of “Consider This” found on WQME Saturday mornings at 9am and Shine 99 on Sunday’s at 10am. Joe also has served as an Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning. Securities offered through World Equity Group, Inc., member FINRA/SIPC, a broker dealer and SEC registered Investment Advisor. Advisory Services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated and are not affiliated. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524.