About the intelligent investor
The weekly column of ‘The Intelligent Investor’ by Jason Zweig, has been published in the Wall Street Journal for about a decade and is published exclusively in Globes. According to Zweig: “My goal is to help you distinguish between the good advice and the one that just sounds good”
About Jason Zweig
One of the senior journalists of The Wall Street Journal. Author of the book “Your Money and Your Mind: How Neuroscience Can Help You Get Rich”, and the editor of the updated version of the bestseller “The Intelligent Investor”, defined by Warren Buffett as “the best investment book ever written”
Forget EMH, the “efficient market hypothesis”. What we need is a new definition, SMH: “The Monkey Market Hypothesis”. In the framework of the EMH, the market prices of assets such as stocks and bonds reflect all available information. In the framework of the SMH – or the simian market hypothesis – market prices reflect everything that homo mercans – the merchant monkey – feels is worth paying attention to.
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Just look at what happened this week with AMC shares. The company’s shares were among those that earned the nickname meme shares, and were loved by the army of day traders that grew in the last two years.
AMC , the largest chain of cinemas in the world, entered into difficulties from the moment the corona epidemic began. In January of last year, a large group of day traders banded together on a buying spree that sent the stock price of AMC, which was on the brink of bankruptcy, soaring. Their goal: to make a “short squeeze” that would crush the Wall Street professionals who had bet against the company, and cause AMC stock to soar.
The aggressive investors, who called themselves “monkeys,” drove AMC’s stock up nearly 1,200% in 2021, ultimately allowing the company to raise much-needed cash to buy more time by selling the stock to the public. At its peak, the monkeys owned more than 80% of the company’s shares.
While the monkeys threw the company a lifeline, AMC made an exaggerated move and asked shareholders for approval to issue another 500 million shares. This would have gotten the company out of its financial woes – but also spread its future profits over a much wider basis, diluting the interest of the company’s investors to hold its shares.
The monkeys went berserk, protesting on social media, until AMC CEO Adam Aron backed off the idea.
The monkeys won – but AMC was still in intensive care. Earlier this month, the company’s quarterly report warned that it was burning through cash at a rate that was “unsustainable.”
The company overtakes the monkeys in a round
And so, under the threat of the monkeys, AMC simply bypassed them in the round. On Monday, the trading in preferred shares of AMC (NYSE: APE) began. The company created them as a special dividend for existing investors, who received one APE unit for each AMC share they held. The company had about 517 million ordinary shares issued as of the beginning of August.
Unlike with ordinary shares, an AMC can issue APE units without needing shareholder approval again.
Although the first round of APE shares did not raise new capital for the company, AMC can issue up to 483 million additional such units at any given moment, to raise money, without asking permission from its investors. The company may even issue another 4 billion APE units if the board approves the move, again without having to seek permission from existing shareholders.
This will bring the company the capital it needs to pay off huge debt and expand its international operations. It would also dilute any future earnings across a much wider share base, shrinking the ownership interest of existing shareholders.
“Considering the flexibility that the ability to issue another APE will give us, we believe that we will be able to raise money easily if we decide to do so, and this will greatly reduce the risk to our survival,” Aron said in a conference call on August 4.
Under the efficient market hypothesis, all of this should have hurt both the value of the AMC shares and the value of the preferred shares together.
But in the monkey market hypothesis, on the other hand, investors’ moods change like transparencies jumping from tree to tree.
Before offering the APE, AMC told investors that these units “are intended to have the same economic value and voting rights” as the company’s common stock. If shareholders approve the move, she said, each APE unit could eventually become AMC common stock. Therefore, the company stated, AMC and APE “should have the same market value”.
But in early trading on August 22, both AMC shares and APE units climbed until their combined price reached $23, 25% above AMC’s closing price the previous trading day.
Then, at the end of that first day, the combined market capitalization of AMC and APE had shrunk to less than $16.50. This is a decrease of about 9% compared to the final closing price of AMC one trading day earlier.
If AMC ends up issuing hundreds of millions of new APEs, even this low price could prove too high.
The high loyalty of the monkeys
One likely reason the market has not yet settled on a fixed price is that many of the monkeys retain a high degree of loyalty to AMC, even after the company’s management has largely abandoned it.
In 2020, key people in the company – senior managers and directors – owned only 2.5% of AMC shares. Since then they have abandoned almost all their holdings; Today, those people only own 0.2% of the company, according to FactSet data.
“The daily investors came to the rescue of the company, while management was liquidating assets at their expense,” said Alicia Reese, an analyst who follows AMC at Wedbush Securities.
A spokesman for AMC said no one was available to comment on the matter this week.
APEs are good for society – but probably bad for monkeys. In the end, they will likely have a very diluted ownership interest in the company, which is no longer on the brink of death.
According to the efficient market hypothesis, a company’s stock price is the best estimate of how much the company is worth. According to the monkey market assumption, figuring out how much stocks are worth is monkey business.