You may have heard that Keppel Land Ltd (SGX: K17) will soon be delisted and be absorbed into Keppel Corporation Limited (SGX: BN4). For investors who have been invested in Keppel Land since its “Straits Steamship Land” days some 33 years ago, they’d have enjoyed a total return of 1,450% after adjusting for reinvested dividends. That works out to be an annualised return of 8.5% over 33 years – not bad at all. Happy campers and disgruntled folks But while long-term investors of Keppel Land would likely be happy with what they’ve got, there seems to exist a bunch of investors in the…
For investors who have been invested in Keppel Land since its “Straits Steamship Land” days some 33 years ago, they’d have enjoyed a total return of 1,450% after adjusting for reinvested dividends. That works out to be an annualised return of 8.5% over 33 years – not bad at all.
Happy campers and disgruntled folks
But while long-term investors of Keppel Land would likely be happy with what they’ve got, there seems to exist a bunch of investors in the company who are disgruntled. And, they’re made up of folks who have bought shares in the firm starting from late January this year.
After Keppel Corp first announced its intention in late January to take Keppel Land private, shares of the latter had been trading mostly in the range of S$4.45 to S$4.55 per share.
Investors who had bought shares of Keppel Land after the privisation announcement had likely wanted to take advantage of the higher offer price of S$4.60 that Keppel Corp had made known.
When Keppel Corp made its offer, there were two price-levels. The company was willing to pay S$4.38 per share for Keppel Land, but if it manages to control some 95.5% or more of Keppel Land by the end of its offer, it would be willing to bump up its offer price to S$4.60.
But as it turns out, Keppel Corp only managed to amass a 95.1% stake in Keppel Land by the time its offer ended on 31 March 2015. This meant that the takeover price for Keppel Land would be fixed at the lower bound of S$4.38, thus likely causing losses for investors who had bought shares of the company after the takeover was first announced.
There was a recent Business Times article which had touched on this topic and in it, I read that some market participants – the ones who likely had bought Keppel Land after the privatisation was announced – are actually complaining about Keppel Corp not extending the deadline of its offer.
For me, the behaviour of those market participants reveal a key difference between a real investor and a speculator.
Calculated risks and blind gambles
Now, don’t get me wrong. I’m not saying that buying Keppel Land’s shares after the privatisation announcement was made to take advantage of a difference between its market price and the possible takeover price (a process known as arbitrage) would necessarily be a speculative endeavor.
In fact, billionaire investor Warren Buffett was quite well-known to have used arbitrage-related strategies very successfully at the beginning of his investing career. He even called such a strategy – of buying a company’s shares at a market price slightly lower than its possible takeover price and then pocketing the difference when the takeover offer is successful – a “workout.”
But the thing with Buffett is that he knows the risks of making losses on that strategy and he would only invest in workouts if the risk/reward relationship is in his favour. For each workout he’s participating in, he knows that there’d be some that won’t end up in a favourable manner for him – but Buffet also knew that statistically speaking, he’d still come out ahead over the long run.
The difference between Buffett and that of the speculators who complained about Keppel Corp not extending the offer deadline is that the latter group were likely not expecting themselves to be making losses.
They bought shares of Keppel Land below S$4.60 and above S$4.38, thinking that it’d be a sure-win bet without careful consideration of the downside risks.
To put it simply, they were merely gambling and like all gamblers, when they lose, they’d blame the weather, or blame someone touching their shoulders while the cards were being dealt. They’d also blame Keppel Corp.
There is a subtle – but very important – difference between taking calculated risks and gambling. We Fools (with a capital “F”) must be aware of the difference.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns Keppel Corporation Ltd.