“I understand economics, I understand business, I saw a good investment.” That's how Prime Minister Benjamin Netanyahu explained the dream deal he made with his investment in SeaDrift shares, which he bought for $600,000 in 2007 and sold for $4.3 million in 2010. A 616 percent yield in four years is a successful investment by any measure, certainly at a time when the global economy was coping with a severe financial crisis.
It should happen to all of us. If all Israelis invested in the stock market during that same period had made the same profit on their investments, Israel would have shot up to the top of all the world’s wealth and happiness indices. But the public is not Netanyahu.
No one doubts that the prime minister understands economics. He was one of the best finance ministers Israel ever had. Nor is anyone arguing over whether he made a good investment. According to him, he bought the shares with his own money, at the same time as other investors bought shares, all at the same price, with no discounts or benefits.
But understanding economics doesn’t necessarily dovetail with knowing how to manage investments. Despite Netanyahu’s great success with this investment, the fact that he sank so much of his own money into a single stock – of a private company that wasn’t being traded on the stock exchange – raises several questions from an investment perspective.
We don’t know anything about Netanyahu’s investment portfolio at the time. We don’t know how large it was. But even if the portfolio totaled $2 million or even $3 million, an investment of $600,000 in one company is a very risky investment decision, more suited to speculators than to people who understand economics and business.
The second question relates to the valuation of the company. In 2007 Netanyahu purchased a 1.6 percent stake in SeaDrift for $600,000. Based on that transaction, the company was worth $37.5 million, or maybe a bit more, since Netanyahu didn’t get a controlling premium, which has economic value. But company documents show that a year afterward, a deal was made to sell 18.9 percent of the company to Graphtec International for $135 million, indicating a company value of $715 million.
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Netanyahu told Channel 12 News that his cousin, Nathan Milikowsky (“He’s a genius”), had purchased a failing company and improved it. But even if that’s true, its skyrocketing value, as reflected by the price at which Netanyahu bought his shares and the price at which, a year later, a stake was sold to Graphtec, demands an explanation. This isn’t a high-tech company, but an industrial company that manufactures coal byproducts.
In April 2010, Graphtec announced that it was buying SeaDrift’s remaining shares and that the firm’s value had plunged to $308 million, a drop of 57 percent compared to 2008. That’s when Netanyahu decided to sell his shares, for which he received $4.3 million. That’s a reasonable price in relation to the company’s value at the time. But looking back to the point at which he’d purchased the shares, the price he paid looks very low, a real bargain. Not exactly free, but close to a 95 percent discount. That would explain why he was prepared to risk $600,000 on a single stock, which apparently was a very substantial part of his investment portfolio.
So was he taking a risk, or did Netanyahu have inside information?
A typical investor who isn’t a speculator wouldn’t have put a substantial portion of his investment portfolio into one share, but would have spread the investment over a number of stocks. In the investment world it’s common to speak of investors who are risk-averse and risk seekers. The risk-averse prefer to invest in blue-chip stocks and diversify the portfolio as much as possible. Risk lovers will do the opposite. The risk-averse also prefer to invest in negotiable assets that can be sold at any time.
Netanyahu’s investment at the time he made it, in shares of a private company, was not a negotiable investment. But his cousin’s presence in the company probably reassured him that there would be someone who would buy up his shares if he’d ever want to see his money again. Based on the price Netanyahu paid for the shares, relative to the market value of the firm in 2008, it’s hard to call Netanyahu a risk-seeker. Who would refuse an investment opportunity at a 95 percent discount compared to the value at which it was sold a year after the investment?
It’s hard to know if, when Netanyahu bought the stock, he already knew that the company was going to be sold and at what price. It’s possible his cousin Milikowsky told him it might happen, which is why Netanyahu was prepared to make the investment and take the risk. Since we’re talking about a private company not subject to securities regulations, even if the prime minister had inside information, the transaction was perfectly legal.
Inside information can very often be more valuable than economics and business knowledge. The knowledge that someone is buying something at a price much lower than its true value is better than a doctorate in economics or a professorship in investment management. Is that what allowed Netanyahu to do so well with this investment? It’s a possible explanation, but it turns the investment into more of a valuable gift more than an investment by someone who’s economically savvy.