Originally Posted by
Stranger_Danger
This sort of situation does raise some interesting questions about the proverbial "cash on the sidelines" that bulls like to talk about.
One interesting feature of the last 6 months is the degree to which a box ticking mums and dads investor could easily have become fully invested, without making a single real investment decision.
In other words, lets say they are generally a "buy and hold forever" type and owned shares in 25 companies in NZ/AU a year or so back. Lots of household names and perhaps a few small/mip caps.
It is quite possible that 10-12 of their holdings have had capital raisings in the last 6-12 months.
Now, ponder this.
(a) Returns on cash are nearly nil.
(b) The new shares are issued at a big discount.
(c) It comes with a big fat document that looks boring.
Anecdotally, I'm sensing that most people are not looking past (a) or (b). If they can find the cash, they take up the new shares.
The result of this is that - without making a single proactive decision - the investor has "doubled up" their exposure to markets, to retain the same (or in issues with institutional placements, sometimes less) exposure to the future profits and dividends of their investments.
Because of the discounted nature of the placements, they've reduced their average price therefore improving their overall portfolio gain/loss and are showing nice gains on the new shares.
There is a psychological "wealth effect" going on here, increasing confidence.
However, the devils advocate view is they've reinvested without making proactive decisions, eaten up their cash buffer, doubled up to retain the same perentage ownership (what are EPS figures going to look like?) and increased their exposure to the same managers that got them here.
It is *totally* a good thing that the capital raisings of the last year have partially restored the balance sheets of the actual businesses we as a community rely on to employ people and provide goods and services.
However, what would happen to investor sentiment should we get a second leg down, and many find out they've (fairly unwittingly) doubled up, erased their buffer, and now both their new and old shares in XXX long term holding are now underwater?
I'd say it would be pretty ugly, and if you need to raise cash, you'd want to have done so before that point.