Medibank Private: The Risk of Going Backwards from an Overpriced Stock

I thought I should comment on this today because there may never be another opportunity. Taxpayers have had a win! Sort of…

As you probably know by now, the government managed to flog Medibank Private off for a massively inflated value recently.

They sold shares in the newly privatized company for $2 to retail punters and $2.15 to institutional idiots. Why do I say its value was inflated?

Because yesterday was its first day of trade on the ASX…and it finished down. Normally, if a stock lists on the stock exchange and the sale price represents good value, the stock price goes up.

Clearly this wasn’t the case with Medibank…there wasn’t too much additional demand for shares (at such a high price) yesterday. On a day when the ASX 200 surged 61 points, or more than 1%, Medibank finished 2.3% lower than what fund managers paid for it.

On that evidence, taxpayers got a good deal…shareholders not so much, though I should put that statement into perspective. It’s not as if taxpayers will actually get to see any of the cash from the sale. The government will no doubt squander/redistribute it in their own special way.

So why did I call the fund managers idiots? Well, I don’t mean all of them. But some of them are because they perpetuate a ludicrous system. That is, many fund managers simply had to buy Medibank whether they thought it was a good buy or not.

That’s because they need to follow ‘the index’ and because it’s a large stock, Medibank is now a part of ‘the index’. From the afr.com:

Medibank is a must-own stock for many big funds because their returns are benchmarked against indices. By not owning the shares, they risk going backwards if Medibank rallies, and as a top-50 company it will be represented in almost every index.’

Gee, you wouldn’t want to risk ‘going backwards’ from owning an overpriced stock, would you?

Greg Canavan+
For Markets and Money


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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