Research Trumps Illusions

By Dian Vujovich

Things aren’t always as they appear. Take the price on shares of AIG, for instance.

I’d thought about buying 1000 shares of the world’s largest insurer when it was trading in the $1.10-$1.30 per share range. I figured that over the long term, like in 10 years or more, the company was not going to fail and the stock ought to be trading considerably higher. Never did make the trade.

Yesterday morning, when looking at the prices of a number of stocks I watch, I saw that company’s stock trading over 20 bucks a share and almost had a heart attack. If that were indeed the case, it would have meant an overnight move upward on AIG shares of more than 1600 percent. A 16-bagger as Peter Lynch would say.

After my fifth cup of coffee, I calmed down and decided to do some long overdue research on the company—research involving way more than merely watching its stock price.

Turns out, the price per share was right. But, it reflected a 1-for-20 reverse stock split approved by shareholders. A 1-for-20 reverse split reduces the number of outstanding shares of the company’s stock, the number you own too, while it hikes up its per share price. So my pretend 1000 shares would now equal 50 shares. But even at 20 bucks a share, a whoop-tee-do AIG buy at say $1.16 per share would have made that didn’t make investment worth less at yesterday’s closing price than it was on Tuesday’s.

AIGs per share price this morning (Thursday), was around $18. Over the last 52 weeks, its price ranged from around 6 to 621 bucks. (Yahoo finance numbers used here.)

Someone not watching AIGs price, or reading about the history of the company—or its this week reverse-split news—could easily get the wrong impression about the firm. Illusions, after all, are nothing new when it comes to the insurance business or on Wall Street.

The moral of this story: Research rules no matter what company you’ve an interest in purchasing shares of.