In answer to your query as to why a stock could trade below its cash value I I have included some quotes of famous investors including the man himself Warren Buffet.
The most human powerful human emotions are fear and greed and when investors are gripped by fear they make irrational decisions.
They may be triggered by margin calls, or just a flight to the safety of cash, and when everyone is trying to get out at the same time people hit the panic button. Greed has been overtaken by fear.
So despite your belief that stocks cannot trade below cash value when the next leg down comes many investors including yourself will start to question yourself and wonder have the banks called in their loans to CCP and appointed Insolvency specialists like CLH and shareholders are left with nothing.
There be many reasons for this, a dramatic revaluation of the PDL book or the banks own liquidity problems.
In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.
Hence the prices of common stocks are not carefully thought out computations, but the resultants of a welter of human reactions. The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly, but only as they affect the decisions of buyers and sellers.
The market is a voting machine, not a weighing machine. It registers and reflects the thousands upon thousands of personal opinions about tomorrow. It swings high and it swings low on the facts and fancies that move men to investment action
“The excellent performance of the stock market, which surprised nearly all the experts, is a reading on consumer confidence. To put it another way, the stock market is a voting machine, not a weighing machine.“
In other words, Buffett specialized in finding “undervalued” issues on the market. Such opportunities arise occasionally, he says, because in the short run the stock market acts like a “voting machine” (reflecting all kinds of irrational attitudes and expectations), while functioning in the long run more like a “weighing machine” (reflecting a firm’s true value).
If they do not go out of business they might be a great buy at $2 but if the price action is telling you there is something seriously wrong would you put $50,000 in knowing you could lose it all the next day in the absence of confirmation that they have the banks continued support.
FWIW. I called the bear market of the dot com crash in the UK where I posted on a Website called Interactive Investor and was voted the most valuable contbutor in a poll of 1.5 million users under the name Thegoodfella. I was often quoted in the press and TV.
I retired in 2002 and came to live in Australia. I don't trade now as I don't have the mindset due to tragic personal circumstances, but merely like to offer a contrarian view.
I have nothing to gain from a decline in the CCP price.
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