Ann: Changes to allowable investments, page-41

This will sound nutty but I will say what I think 'cheap' is.

Shares have a psychological component to their price. When people in the market are in a good mood shares will be expensive and when they are in a bad mood they will be cheap. So how do you measure the mood?

I look at the mood through LIC NTA discount/premium like eerrt. The reason is a bit subtle/crazy. I have decided that LICs are the same as any other shares, that is they a expensive when the market is in a good mood and cheap when it is not. Now NTA includes the market mood in its calculation, i.e. each of the shares in the NTA has a mood component. So there are two mood components, the NTA and the LIC share price. So LICs have double mood factor which amplifies the mood. So when the premiums are high LICs and shares are expensive and when the discount is low LICs are cheap. All that means its easier to pick a cheap LIC than a cheap stock.

There are many other factors that are reflected in premium/dicount though. The main one is capital management. For example, in January 2013 ALF had 72M shares on issue. Its now, 2 years later, 254M shares on issue. Its hard to see these extra 180M shares in long term investor hands. ALF can buy back 10% a year but that only covers 25M of the 180M. Anything more will require shareholder approval. When things get tough there may be a run for exits (buying opportunity).

The other factor I watch is the marketing ability of the LIC. WAM/WAX/WAA seem to do this well with their TV and Internet appearances. ALF not so much. Investor sessions may be good though I cannot get to them.

Told you its a bit nutty. But I do look at performance before worrying about how cheap it is.

Oh, and I think ALF is half way between cheap and expensive.

Cheers