Saturday, January 13, 2007

Marketable and Investment Securities

Marketable and Investment Securities is probably one of the most neglected rows in the balance sheet after the "others" column. I mean most people look at cash, shareholder's equity, assets. If they have any more free time, they look at debt, accounts payables and receivables and inventory. Who has got time to figure out marketable and investment securities?

Well in most cases, even if you don't figure them out, it doesn't really matter. That's why most people don't look at them. They only matter when the daughter (or son) becomes more important than the parent. Now what the hell does that mean?

Marketable and Investment Securities refer to stock holdings of the company. Marketable simply means the company has no intention in holding them for the long-term and would sell them when it's appropriate. Investment securities are usually holdings of subsidiaries or affiliate co.s and the parent company has no intention of selling them.

Now bcos of accounting rules, these holdings may be accounted for at cost (i.e. at prices when the parent acquired them) or at market value 1 yr ago (i.e. when the book closed last yr). In some cases, the market value of these holdings may have grwon to be quite significant, e.g. 50% of the parent's market cap or more. Such cases would arise when the stock market enters a rally trend, or circumstances like acquisition offer or simply bcos the subsidiary grew so much faster than the parent.

So essentially when you buy the stock, you get a lot of "freebies" that comes along in its balance sheet. And investors love this kind of stuff. One good example would be Yamaha Corp, the musical instruments maker.

Yamaha Corp owns 20% of Yamaha Motors, the motorcycle maker. And Yamaha Motors market cap is now a few times more than that of Yamaha Corp, its parent co. bcos of its cheap and quality motorcycles are selling like hotcakes all over the world. So when you buy Yamaha Corp, you are actually buying its musical instrument business, plus a huge freebie: shares in Yamaha Motors.

However, this value may or may not be unlocked bcos Yamaha Corp may want to hold on to its shares of Yamaha Motors, instead of selling it and returning the cash back to shareholders. In that case, you can only suck thumb.

See also Cash and Debt
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