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Path: utzoo!watmath!clyde!floyd!cmcl2!rocky2!cubsvax!peters
From: peters@cubsvax.UUCP
Newsgroups: net.invest
Subject: Re: Old & New AT&T Stock
Message-ID: <156@cubsvax.UUCP>
Date: Thu, 2-Feb-84 10:29:39 EST
Article-I.D.: cubsvax.156
Posted: Thu Feb  2 10:29:39 1984
Date-Received: Wed, 8-Feb-84 03:11:12 EST
References: <328@hogpc.UUCP>
Organization: Columbia Univ Biology, New York City
Lines: 36

Bruce Burger (houxn!dossamg) states that, if old and new stock is
available on the open market, only temporary market inefficiencies
should allow price differentials to exist, and these differentials
will be small.

This is untrue, historically.  There are a number of "closed end mutual
funds" traded on the open market which consist of market-baskets of 
securities.  According to efficient market theory (of which Bruce's
argument is an example), these should always trade very close to
the value, per share, of the market basket which they represent, after
perhaps allowing some small discount for administrative costs, etc.
Historically, however, they sell for *large* discounts -- like 20% !!!
These discounts are public knowledge... in fact, the NY Times lists
them (under "Publically Held Funds") in the Saturday business section,
and the Wall St. J. lists them Monday, I believe.  These discounts also
are quite volatile.

Case in point:  several years ago I bought two of these -- U. S. & Foreign
Securities and Tricontinental Corp., both of which are traded on the NYSE,
when the discount was about 20%.  Tricontinental recently announced that
it plans to dissolve and distribute its assets to the stockholders ...
whereupon the discount disappeared!!

Burton Malkiel's "Inflation Beater's Investment Guide" talks about how
to build an investment strategy using these funds.  He is one of the
framers of efficient market theory, and he confesses he doesn't know
why this inconsistency exists.

By the way, I have no views on how this relates to the breakup of AT&T.
I recently traded my (old) AT&T stock for the "Equity Investment Fund", which
holds a market basket of the child companies... but after I did this
it occurred to me that I will lose money if this starts trading
at a discount....

{philabs,cmcl2!rocky2}!cubsvax!peters
(Peter S Shenkin; Dept of Biol Sci; Columbia Univ; NY, NY 10027; 212-280-5517)