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Understanding the Stock Market: Tecumseh, Office Depot

This was originally published on RealMoney. It's being republished as a bonus for readers. For more information about subscribing to RealMoney, please click here.

It's the ultimate nightmare. You're sitting down at a table in a game of strategy. You're betting your lifetime savings. And then you realize something that shakes you to your core. You realize that you don't understand the game.

Whether they recognize it or not, many investors are living the nightmare. They're risking their lifetime savings in a game of strategy called the stock market, and, unfortunately, they don't understand the game.

To Play the Game, Understand This: The Purpose of the Stock Market Is to Facilitate Liquidity

Everybody knows that shares can be bought or sold in a matter of seconds in our all-cash, no-contingencies stock market. The market does an amazing job of providing liquidity. But that's all it does. The important takeaway here is not what the concept says, but what it doesn't say.

The stock market does not provide valuation appraisals. The purpose of the market is to tell you price. It does not tell you value. Also, the market doesn't exist to make you happy. It doesn't exist to make money for you. It doesn't exist to tell you how smart you are. It's not that the market is mean or evil. The market is indifferent. It doesn't care if you win or lose.

Last summer, I thought I was smart when I loaded up on Tecumseh Products (TECUA), paying $17 per share. With two of the company's three operating divisions sold, its financial statements required numerous adjustments prior to calculating value. Post-adjustments, the company was debt-free with excess net realizable cash (or soon-to-be realizable cash) of $400 million; it had a $1.1 billion (sales) compressor business worth more than $420 million.

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