LICs and NTA Trap question

[bond21]

So for those who know about LICs, they are valued based on the NTA per share, and then the stock price is either trading at a premium or a discount.

So if you're investing in LICs, you want to buy at a discount to NTA. In a market such as currently which would be argued as expensive, this makes the NTA of these LICs go up because their share holdings have more value right?

So if the stock price of these LICs hasn't gone up with the rest of the market hypothetically, and they were now trading at a discount to NTA simply because of the rise of their stockholdings, could the current NTA be sort of a trap due to the expensive market in general? I mean in an overvalued market, their NTA would rise and could surpass their stock price, so it could give an illusion of being a discount to NTA, when the NTA is actually just overvalued by the market.

Am I accurate in this assessment? Seems to me that buying at a discount has the condition of buying when the market is not overvalued as it is currently.

 

[GlobeTrekker]

Hard to give a general answer, as each LIC is a little different. Some always trade at discount (but at varying sizes of discount), some almost always trade at a premium, and many fluctuate between discount and premium over time (this is the case for the biggest ones - AFI, ARG, MLT, BKI etc).

True, its best to buy an LIC at a discount, but remember that the discount is not the be all and end all. Really you need to look at an LIC's history of discount/premium to make a judgement as to how good the current discount is. Bell Potter puts out a report which gives you a graph of discount/premiums for each LIC. Also look at their share price movement and dividend history over time. Also check out what stocks they actually hold, some (like CIN and HHV) hold a high proportion in one particular stock and you need to make sure you're comfortable with that particular stock holding.

If you believe the market is significantly overvalued and likely to drop, then you probably shouldn't invest in an LIC, as its share price will still likely drop with any drop in the market. But a decent discount (for a good LIC that sometimes trades at a premium) may cushion the blow a little. It may also give you an additional boost if the market happens to keep going up and the LIC moves back into premium.