Easy Money: The Right to Oversubscribe – Part I

A long, long time ago, when you were very young, I began buying shares of Coastal Caribbean Corp., traded — no less — on the Boston Stock Exchange. (I know. You didn’t realize Boston had a stock exchange. Well it does. And unlike the Cincinnati exchange, which is in Chicago, the Boston exchange is in Boston.)

These purchases fell under the rubric of “do as I say, not as I do,” since the last thing any sane person would have done then (or would be doing now) is to buy shares of Coastal Caribbean. It is a company that doesn’t do anything. All it has is leases to drill for oil and gas under about a billion acres of land off the West Coast of Florida, where you’re not allowed to drill, and under things like the Everglades, where you’re not allowed to drill, either. And it has a couple of big lawsuits, one against the State of Florida for not allowing it to drill, another against some giant companies for an ancient dispute over something or other I vaguely recall relates to fertilizer. (Oops—I just checked. They lost that one.)

So this is basically me violating all my rules of sensible investing. It’s a pure speculation, a gamble that one day . . . one day . . . ONE GLORIOUS DAY! . . . my ship will come in. It’s kind of like a rich man’s lottery ticket, except I’m not so rich (and certainly wasn’t when I started buying this junk), and the odds aren’t necessarily bad, as they are in the lottery. They may be bad, but that’s not a clear mathematical fact.

The stock does have two things going for it. First, no one follows it, and the only story I remember seeing about it was an A-head a few years back in The Wall Street Journal making fun of it. (The A-head is what the Journal calls that middle column reserved for stories about animals and people who can twist their noses into funny shapes.) I forget how long ago this story was, maybe five years, but it featured the company’s president (one of a total of two employees, if I remember right, the other being his secretary) canoeing down some nearly-dry mosquito-plagued Florida “river” trying to establish, for the purposes of one of its lawsuits, that it was “navigable.” Because if it was, then that would prove . . . something. And the Journal sent a guy to record the folly. I just remember that it was a funny story, the basic slant of which was that, even at whatever lofty price it had by then climbed to — possibly even a dollar — the stock was a joke.

I had begun buying it at 37.5 cents about 20 years ago. Sure, it wasn’t General Electric. But with the money I had 20 years ago, I could only buy 7 shares of General Electric. I could buy 1,000 shares of Coastal Caribbean. At some point Coastal Caribbean got up to 75 cents and I cashed out.

Then in 1991 I noticed it back around 37.5 cents and, now a little less poor, bought 10,000 shares. And then 25,000 more in 1992 at fifty cents. And 20,000 more in 1993 at 43.75 cents (“seven-sixteenths”). I know you’re not supposed to fall in love with your stock (“because it doesn’t know you love it,” as Adam Smith long ago explained). But imagine being able to say you own 55,000 shares of something! Picture Treat Williams in The Phantom when he gets to hold that third magic skull. “I LOVE THIS,” he roars with exultation.

And the thing was, while I knew it was a wild speculation, there was a second thing Coastal had going for it. The first, as I say, was that no one paid any attention to it (or else laughed). The second was impatience. Most people are impatient. If you tell them that there’s some stock that’s 50 cents now and has almost no prospect of going anywhere soon . . . but that in ten years a lawsuit might finally be resolved that could make the stock $8 . . . they will (perhaps quite sensibly) roll their eyes and buy something else. “Remind me in nine years,” they will say. Never mind that if the stock actually were $8 a share ten years later, that would have represented a 32% compounded annual rate of return.

So where logic or math might ascribe a higher value, the demand for stocks that require great patience falls short of their supply. Hence, it might be argued, those stocks are sometimes cheap.

Not for a minute, of course, am I suggesting this stock is headed for $8, let alone in 10 years. Sure, the Alaskan Indians got their billion-dollar settlement, or whatever it was; but wasn’t it like 100 years in the making? It’s been 20 years since I first bought Coastal Caribbean, and after the first 17 of those 20, as I say, it was about the same three-eighths or seven-sixteenths of a dollar as when I first stumbled onto it.

In a sense, the market was valuing the stock higher and higher, because over those years the company would periodically sell more shares to raise the money to pay the president and buy him that canoe and, mainly, to pay the lawyers. So the company was divided into more and more shares (currently 40 million or so) each of which was still commanding nearly half a buck apiece.

Now may be a great time to sell, because it’s over two bucks a share. Indeed, last year for a minute it got up over three, and on the way up (or was it down?) I unloaded some at 2-5/8.

But this long, long story is just a set-up to tell you about “rights” and “rights offerings.” Come back tomorrow and I’ll tell you how they work and describe the joys of oversubscription.