Tuesday, November 1, 2011

MF Global A Buy

MF Global (MF) is a broker that trades for its clients and on its own behalf. Yesterday, MF Global filed for bankruptcy! On the day before its filing, three of the eleven analysts covering the company rated the stock as a "Buy" while not one analyst rated it a "Sell".

Analysts are not stupid, so what gives? The culprit is leverage. When leverage is high (90+% of MF's invested capital is funded by debt), it's really hard to tell what the equity is worth. This is because even a small change (or perceived change, as the case may be) in the value of the assets can make the equity worthless.

The analysts who rated this a "buy" may have been overconfident or they may have been herding, but in the end they were just wrong.

Disclosure: No position


Anonymous said...

saj, you have no idea how arrogant a post like that makes you sound. It's always great to take advantage of opportunities to shut up.

Saj Karsan said...

Hi Anon,

I apologize if I offended you, however, it doesn't seem unfair to me to hold someone to task for not being able to tell the difference between a "Buy" and a bankrupt company. This post is not a one-off: it is a prevailing theme on this site that investors should do their own homework, because they will get taken if they don't.

juan said...

The comment by Anon is hilarious, and raucous laughter is the proper response to it...if that's not too arrogant.

Anonymous said...

I hear you saj, but it's not really fair to single out these guys after the fact, when you are not even yourself on the record (before the fact) stating a clear opinion. Would you not say?

Also I must doubt your grand objective of educating the public like you say.

For instance, If your readers need to read your summaries instead of the actual books to educate themselves, clearly your main point is not coming across. no?

There's a reason why guys like Lynch or Fisher are often quoted (or have their books summarized): They've earned that right.

10-year-olds lecturing Berlusconi on how to pick up women have not and are often funny to read.

We get the point that you want to post something every single day but sometimes, there is just nothing of quality to say and those who are candid and are not simply looking for publicity will say just that... nothing. Have you heard of a guy called Cramer? How much respect do you think value investors have for him?

Maybe the time spent adding posts of limited value to your blog can be better used to research names and add value to your own clients.

Anyway, listen, you can choose to shoot the messenger, but i thought i'd let you know out of courtesy that many actual market participants read your posts as comic relief more than anything. I'm not giving up hope on you though, you do have some good ideas sometimes. As arrogant, as I may sound, I definitely feel you can improve your work

Keep it up and best of luck

Josh said...

ha ha. It sounds like Anonymous was probably one of the analysts rating the co a "buy". I think you might have hurt some feelings with your post, Saj!

shadowstock said...

Saj, Love the blog please keep up this outstanding work!!

Saj Karsan said...

Thanks, Shadow!