Why do people gamble? A straight application of prospect theory says that when offered the choice of $1 with certainty versus a gamble with expected value of, say, 85cents then it is rational to stay with the $1. Yet the gambling industry is alive and well and has been for thousands of years. Why? Milton […]
Israel shocked the world this morning by banning all travel from other countries in response to the ‘Omicron-variant’ of the Covid 19 virus. The behaviour of this variant is largely unknown so it is a little perplexing that a perceived leader in the handling of the pandemic should react so abruptly and without the statistical evidence that a reasonable person would demand. Their actions are more surprising given how ‘pandemic-weary’ the world’s populations are, having been continuously subjected to draconian restrictions by well-meaning health regulators without much concern for the broader economic and social consequences of their actions.
The impending danger is that the majority of governments in the world, who individually and collectively are struggling to let go of the draconian restrictions they imposed on their societies, only to declare defeat as recently as a few weeks ago, feel compelled to follow Israel’s lead!!! Please, please, please don’t do this…
At the beginning of the pandemic on March 3 2020, I correctly analysed the economic impact on markets in this blog and earlier still in January 2020 noted the difficulties established institutions had deciding when to switch off their contingency plans during the SARS epidemic. I argued in March 2020 that the economic impact of Covid 19 could only justify a small market correction of about 2%, which would be temporary and followed by a systematic outperformance of the markets over subsequent months. In fact, the stock markets fell close to 40% but rallied back strongly. At the time I wrote that “…I can confidently assert that after this statistical playtime is completed the prospect of predicting a 10% decline in stock prices as a consequence of the Covid19 is statistically zero…” and that “…A feature of the sell off over the past week has been the uniform disposal of equities without much regard for the sectors/countries most negatively affected by Covid19 let alone those pockets that may benefit…”
Ready your powder, team, we are headed for another one of these opportunities but again! If the governments collectively shut down the transport and service sectors in an attempt (doomed to failure by the way) to fight Omicron then something close to panic will set into the markets. The panic this time, however, will not be over the virus itself. Rather, it will be driven by the costly actions of governments trying to fight an unwinnable battle [1].
In any event, the markets look to be weakening for the next week or two. Get ready to buy with your ears back…
1. The government’s resources would be better applied to understanding exactly what the Omicron-variant really represents so that they can make fully-informed decisions. At the beginning of the pandemic the established folk-lore held that the death rate would be 4% and this would affect all age-groups uniformly. Subsequently, it became known that many infections were asymptomatic such that the true death rate is closer to 0.2% or lower and that unhealthy people above 60 are those most likely to succumb. I venture an opinion that if the true statistics were known in advance of the first lockdown orders then there would have been none.
Do you like what you read? Then subscribe to our blog below…
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2021-11-28 06:48:282021-11-28 06:49:41Oops they’re doing it again…Omicron
Despite being a source of great mirth, the discovery that highly paid equity analysts and fund managers can do no better than a monkey throwing darts at the stock tables is somewhat unfulfilling. The inability to beat the monkey is consistent with a random walk for stock prices and hence this has been adopted as […]
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2021-10-20 06:16:192021-10-20 06:16:19Gamestop: a test of the test of market efficiency
The way a Green Bond works is the following: 1. A company (or government) says it wants to borrow money to do something ‘Green’. This could be a wind farm, a coconut plantation or something less exotic. 2. The International Capital Markets Association lists 4 broad criteria that need to be followed. These are quite […]
C is the chemical element symbol for Carbon. Carbon is number 6 in the Periodic Table of the Elements and is the fourth most common element in the Universe behind Hydrogen, Helium and Oxygen. Carbon is a fundamental component of many organic compounds and has a common presence in all known forms of life. Wikipedia […]
Lockdowns have become commonplace as a way to prevent or stall a flare-up in Covid-19 infections. The justification for a lockdown must be more than just saving the life of the 1% or so of those who get infected since there are significant costs placed on the broader community. These costs can be as minimal […]
30 years ago, investing was a serious business. (Actually, it was no more serious than it is today, just harder to access.) Opening a brokerage account required minimum balances that were beyond the reach of the average twelve year old, placing orders was manual requiring multiple telephone calls, settlement was T+5 for equities and commission rates were high and non-negotiable except to the most well-heeled investors. These days, technology has wiped out several layers of human intervention to the point that an individual school girl – lets call her Marion – can buy a fraction of a share in her favourite Chinese Dance-Tok company using her mobile phone during play-lunch. Robinhood is the market leader in this astonishing technological advance allowing Marion to spend $5 on Dance-Tok shares without any trading fees whatsoever.
Robinhood has made Marion’s investment experience into something resembling a mobile phone game. A successful trade is trumpeted with a congratulatory rift, confetti streams across the screen and happy faces report profits. Robinhood is also accused as one of the major brokers involved in the Gamestop ‘rocket event’ where a group of like-minded investors began purchasing the company’s stock at higher and higher prices for FUN. Gamestop was ripe for a short-squeeze on account of some high profile hedge funds being negative on the stock. As the stock rose from $8 to $50 the shorts were forced to cover and onward went the shareprice to $460 at its height. Unlike the traditional approach to squeezing shorts where a small group buy the majority of the outstanding float of a stock, this was a ‘crowdfunded’ voluntary coordinated effort that drove Gamestop’s price far beyond its arbitrageable limits without attracting arbitrage.
The Gamestop – rocket has largely come back to earth and the regulatory post-mortems have begun. Robinhood’s gamification of the investing experience is directly in the sights of the SEC, congressional lawmakers and various agencies. Is an app that opens up the investment markets to the Marion’s of society such a bad thing and should it be allowed to be ‘FUN’?
The Efficient Markets Hypothesis (EMH) has a lot to say about this issue. In its simplest form, the EMH posits that the current price of a security is an unbiased predictor of the range of future outcomes for the stock. Another way to think about it is that the price of the stock reflects all publicly available information so that there can be no advantage to any individual investor from studying what is already known in the market. This is great news for Marion and her friends who decide to purchase IBM, JPMorgan or Dance-Tok during play lunch. The EMH promises that her investing experience will be just as safe as any other investor in the markets – she is on a level playing field with all other investors. The EMH also posits that the expected return on a stock must be positive in order to induce investors to hold it (there are exceptions to this rule) so that Marion’s investing game actually has an expectation of making money whereas most other games require in-app purchases which are costly to keep playing. Robinhood therefore finds a lot of support for its app from the EMH.
The EMH, on the other hand, has a tougher time defending the cohort driving Gamestop’s rocket experience. $460 is a long way from a fair-value range for the stock of $5 to $10 as some analysts had posited. As the stock price rose many times short sellers must have been tempted to sell. However, this risked being slammed by the cohort of rocketeers that simply bid up the stock at every opportunity. In its strictest form, the EMH requires that a self-financing portfolio should not have a positive return. This is the rule against a money-machine that costs nothing to operate but spits out money at various points in time with no risk of a negative outcome. On this logic Gamestop’s rocket did not violate the EMH since there was always a chance that some rocketeer would push the stock price higher for FUN thereby causing a loss to short sellers. At some point, of course, the rocketeers run out of money and the FUN stops.
I doubt that stopping the bells, whistles and confetti on Robinhood will make the app any less appealing or relevant to the new breed of investor. Forcing Robinhood to charge a fee per trade, on the other hand, will kill the rocketeers but also force the Marion’s of society to seek their thrills in Roblox. This would be such a shame
Do you like what you read? Then subscribe to our blog below…
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2021-03-07 09:09:452021-03-07 09:16:36Robinhood, the Efficient Markets Hypothesis and the Gamification of Investing
As its name suggests, a Special Purpose Acquisition Company (SPAC) is a listed cash box that acquires a private company to take it public. At the time of its creation, the SPAC may state a broad purpose to source and acquire companies in a particular industry but the actual target is unknown when it lists. Initial investors place their trust in the promoter to find a ‘good’ target however they have an option to redeem their investment if the proposed target is unsatisfactory. The SPAC promoter has 2 years to find a suitable target or it liquidates. The promoter, for their part, in general receive 20% of the target company once acquired.
SPAC’s have been around for many years in various forms but they have become popular recently as a way for private companies to bypass the traditional IPO process in a post-Private Equity world. The traditional IPO process has historically underpriced companies going public by 27% on average leading to criticism that the process is run by Wall St for the benefit of Wall St. In 2020 and 2021, moreover, the degree of underpricing of IPO’s has been significantly more than that average where it is not uncommon for newly listed entities to double in price on listing day or more within a week.
Wall Street’s claim that a ‘successful IPO’ is one that delivers a stag-profit to favoured customers is at the core of the search for an alternative financing vehicle. Stags’ gains are subsidised by the pre-IPO shareholders (founders, angels, venture capitalists and private equity investors) since these stakeholders receive less than the opening day market price places on the company. For instance, an IPO which prices at $100 and raises, say, $100m in new capital, but then lists the next day at $127 per share delivers $27m to the new investors. This $27m is money that long-standing pre-IPO investors don’t receive despite bearing much greater risk.
Disgruntlement with the traditional IPO process gave rise to the market for private capital. ‘Private is the new Public’ enabled the likes of Spotify, Uber, AirBnB and a host of other new companies to grow much larger without accessing the public capital markets by drawing on pools of private capital entrusted to expert deal makers in the private equity and venture capital space. These private structures were successful in meeting capital demands but could not provide either pricing or liquidity to shareholders. This is an inescapable function of the public markets. Is there a way to achieve a public listing without having to suffer the underpricing of an IPO?
Enter the SPAC. To my mind the main difference between a SPAC and an IPO are the incentives for the promotors/lead managers. IPOs have an incentive to underprice whereas the SPAC promoter takes 20% of the target so that they have an incentive to overprice. Indeed, this seems to be the case with something like 60% of SPACs trading at a discount of 20% or more 6 months after completing their acquisition. Wall St points to these numbers as failures but pre-listing shareholders who sell early are smiling.
Of course the best result from a market efficiency standpoint is a listing mechanism that delivers a fair price at listing for existing shareholders without either subsidising Wall St or paying a large fee to a promoter. This mechanism is a ‘direct listing’ which simply takes a private company into a public market and lets risk-takers (real buyers and real sellers with real money) determine the market clearing price. This was Spotify’s approach and everybody except Wall St and the SPAC promoters were smiling.
Do you like what you read? Then subscribe to our blog below…
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2021-02-21 03:26:412021-02-21 03:27:25SPAC’s place in the world
Reuters headline: “New York and Florida tell hospitals to dispense vaccine faster or lose supply” Jan 4 2021 Which of the following would you expect to see during a pandemic? A. Unused vaccine serum sitting idle; or B. Shortage of vaccine supply It would seem that the natural tendency would be toward B – that […]
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2021-01-05 03:07:402021-01-05 03:07:40Socialism fails once again in distributing the Covid vaccine
If there was one thing that was certain to flow from the Covid-19 pandemic, it is the volume of fascinating new research into the way people and governments react to the danger that the virus creates. You may recall that early on in the crisis there were dire predictions of breakdown in the health systems’ […]
https://www.firstdegree.asia/wp-content/uploads/2018/04/logo.png00Stephenhttps://www.firstdegree.asia/wp-content/uploads/2018/04/logo.pngStephen2020-12-07 01:46:422020-12-07 01:46:42Covid Notepad 3…plus a comment on Brexit
Crypto-in-the-utility-function
Why do people gamble? A straight application of prospect theory says that when offered the choice of $1 with certainty versus a gamble with expected value of, say, 85cents then it is rational to stay with the $1. Yet the gambling industry is alive and well and has been for thousands of years. Why? Milton […]
Oops they’re doing it again…Omicron
Israel shocked the world this morning by banning all travel from other countries in response to the ‘Omicron-variant’ of the Covid 19 virus. The behaviour of this variant is largely unknown so it is a little perplexing that a perceived leader in the handling of the pandemic should react so abruptly and without the statistical evidence that a reasonable person would demand. Their actions are more surprising given how ‘pandemic-weary’ the world’s populations are, having been continuously subjected to draconian restrictions by well-meaning health regulators without much concern for the broader economic and social consequences of their actions.
The impending danger is that the majority of governments in the world, who individually and collectively are struggling to let go of the draconian restrictions they imposed on their societies, only to declare defeat as recently as a few weeks ago, feel compelled to follow Israel’s lead!!! Please, please, please don’t do this…
At the beginning of the pandemic on March 3 2020, I correctly analysed the economic impact on markets in this blog and earlier still in January 2020 noted the difficulties established institutions had deciding when to switch off their contingency plans during the SARS epidemic. I argued in March 2020 that the economic impact of Covid 19 could only justify a small market correction of about 2%, which would be temporary and followed by a systematic outperformance of the markets over subsequent months. In fact, the stock markets fell close to 40% but rallied back strongly. At the time I wrote that “…I can confidently assert that after this statistical playtime is
completed the prospect of predicting a 10% decline in stock prices as a
consequence of the Covid19 is statistically zero…” and that “…A feature of the sell off over the past week has been the uniform
disposal of equities without much regard for the sectors/countries most
negatively affected by Covid19 let alone those pockets that may benefit…”
Ready your powder, team, we are headed for another one of these opportunities but again! If the governments collectively shut down the transport and service sectors in an attempt (doomed to failure by the way) to fight Omicron then something close to panic will set into the markets. The panic this time, however, will not be over the virus itself. Rather, it will be driven by the costly actions of governments trying to fight an unwinnable battle [1].
In any event, the markets look to be weakening for the next week or two. Get ready to buy with your ears back…
1. The government’s resources would be better applied to understanding exactly what the Omicron-variant really represents so that they can make fully-informed decisions. At the beginning of the pandemic the established folk-lore held that the death rate would be 4% and this would affect all age-groups uniformly. Subsequently, it became known that many infections were asymptomatic such that the true death rate is closer to 0.2% or lower and that unhealthy people above 60 are those most likely to succumb. I venture an opinion that if the true statistics were known in advance of the first lockdown orders then there would have been none.
Do you like what you read? Then subscribe to our blog below…
Gamestop: a test of the test of market efficiency
Despite being a source of great mirth, the discovery that highly paid equity analysts and fund managers can do no better than a monkey throwing darts at the stock tables is somewhat unfulfilling. The inability to beat the monkey is consistent with a random walk for stock prices and hence this has been adopted as […]
The C-bond
The way a Green Bond works is the following: 1. A company (or government) says it wants to borrow money to do something ‘Green’. This could be a wind farm, a coconut plantation or something less exotic. 2. The International Capital Markets Association lists 4 broad criteria that need to be followed. These are quite […]
C
C is the chemical element symbol for Carbon. Carbon is number 6 in the Periodic Table of the Elements and is the fourth most common element in the Universe behind Hydrogen, Helium and Oxygen. Carbon is a fundamental component of many organic compounds and has a common presence in all known forms of life. Wikipedia […]
The Calculus of Lockdown
Lockdowns have become commonplace as a way to prevent or stall a flare-up in Covid-19 infections. The justification for a lockdown must be more than just saving the life of the 1% or so of those who get infected since there are significant costs placed on the broader community. These costs can be as minimal […]
Robinhood, the Efficient Markets Hypothesis and the Gamification of Investing
30 years ago, investing was a serious business. (Actually, it was no more serious than it is today, just harder to access.) Opening a brokerage account required minimum balances that were beyond the reach of the average twelve year old, placing orders was manual requiring multiple telephone calls, settlement was T+5 for equities and commission rates were high and non-negotiable except to the most well-heeled investors. These days, technology has wiped out several layers of human intervention to the point that an individual school girl – lets call her Marion – can buy a fraction of a share in her favourite Chinese Dance-Tok company using her mobile phone during play-lunch. Robinhood is the market leader in this astonishing technological advance allowing Marion to spend $5 on Dance-Tok shares without any trading fees whatsoever.
Robinhood has made Marion’s investment experience into something resembling a mobile phone game. A successful trade is trumpeted with a congratulatory rift, confetti streams across the screen and happy faces report profits. Robinhood is also accused as one of the major brokers involved in the Gamestop ‘rocket event’ where a group of like-minded investors began purchasing the company’s stock at higher and higher prices for FUN. Gamestop was ripe for a short-squeeze on account of some high profile hedge funds being negative on the stock. As the stock rose from $8 to $50 the shorts were forced to cover and onward went the shareprice to $460 at its height. Unlike the traditional approach to squeezing shorts where a small group buy the majority of the outstanding float of a stock, this was a ‘crowdfunded’ voluntary coordinated effort that drove Gamestop’s price far beyond its arbitrageable limits without attracting arbitrage.
The Gamestop – rocket has largely come back to earth and the regulatory post-mortems have begun. Robinhood’s gamification of the investing experience is directly in the sights of the SEC, congressional lawmakers and various agencies. Is an app that opens up the investment markets to the Marion’s of society such a bad thing and should it be allowed to be ‘FUN’?
The Efficient Markets Hypothesis (EMH) has a lot to say about this issue. In its simplest form, the EMH posits that the current price of a security is an unbiased predictor of the range of future outcomes for the stock. Another way to think about it is that the price of the stock reflects all publicly available information so that there can be no advantage to any individual investor from studying what is already known in the market. This is great news for Marion and her friends who decide to purchase IBM, JPMorgan or Dance-Tok during play lunch. The EMH promises that her investing experience will be just as safe as any other investor in the markets – she is on a level playing field with all other investors. The EMH also posits that the expected return on a stock must be positive in order to induce investors to hold it (there are exceptions to this rule) so that Marion’s investing game actually has an expectation of making money whereas most other games require in-app purchases which are costly to keep playing. Robinhood therefore finds a lot of support for its app from the EMH.
The EMH, on the other hand, has a tougher time defending the cohort driving Gamestop’s rocket experience. $460 is a long way from a fair-value range for the stock of $5 to $10 as some analysts had posited. As the stock price rose many times short sellers must have been tempted to sell. However, this risked being slammed by the cohort of rocketeers that simply bid up the stock at every opportunity. In its strictest form, the EMH requires that a self-financing portfolio should not have a positive return. This is the rule against a money-machine that costs nothing to operate but spits out money at various points in time with no risk of a negative outcome. On this logic Gamestop’s rocket did not violate the EMH since there was always a chance that some rocketeer would push the stock price higher for FUN thereby causing a loss to short sellers. At some point, of course, the rocketeers run out of money and the FUN stops.
I doubt that stopping the bells, whistles and confetti on Robinhood will make the app any less appealing or relevant to the new breed of investor. Forcing Robinhood to charge a fee per trade, on the other hand, will kill the rocketeers but also force the Marion’s of society to seek their thrills in Roblox. This would be such a shame
Do you like what you read? Then subscribe to our blog below…
SPAC’s place in the world
As its name suggests, a Special Purpose Acquisition Company (SPAC) is a listed cash box that acquires a private company to take it public. At the time of its creation, the SPAC may state a broad purpose to source and acquire companies in a particular industry but the actual target is unknown when it lists. Initial investors place their trust in the promoter to find a ‘good’ target however they have an option to redeem their investment if the proposed target is unsatisfactory. The SPAC promoter has 2 years to find a suitable target or it liquidates. The promoter, for their part, in general receive 20% of the target company once acquired.
SPAC’s have been around for many years in various forms but they have become popular recently as a way for private companies to bypass the traditional IPO process in a post-Private Equity world. The traditional IPO process has historically underpriced companies going public by 27% on average leading to criticism that the process is run by Wall St for the benefit of Wall St. In 2020 and 2021, moreover, the degree of underpricing of IPO’s has been significantly more than that average where it is not uncommon for newly listed entities to double in price on listing day or more within a week.
Wall Street’s claim that a ‘successful IPO’ is one that delivers a stag-profit to favoured customers is at the core of the search for an alternative financing vehicle. Stags’ gains are subsidised by the pre-IPO shareholders (founders, angels, venture capitalists and private equity investors) since these stakeholders receive less than the opening day market price places on the company. For instance, an IPO which prices at $100 and raises, say, $100m in new capital, but then lists the next day at $127 per share delivers $27m to the new investors. This $27m is money that long-standing pre-IPO investors don’t receive despite bearing much greater risk.
Disgruntlement with the traditional IPO process gave rise to the market for private capital. ‘Private is the new Public’ enabled the likes of Spotify, Uber, AirBnB and a host of other new companies to grow much larger without accessing the public capital markets by drawing on pools of private capital entrusted to expert deal makers in the private equity and venture capital space. These private structures were successful in meeting capital demands but could not provide either pricing or liquidity to shareholders. This is an inescapable function of the public markets. Is there a way to achieve a public listing without having to suffer the underpricing of an IPO?
Enter the SPAC. To my mind the main difference between a SPAC and an IPO are the incentives for the promotors/lead managers. IPOs have an incentive to underprice whereas the SPAC promoter takes 20% of the target so that they have an incentive to overprice. Indeed, this seems to be the case with something like 60% of SPACs trading at a discount of 20% or more 6 months after completing their acquisition. Wall St points to these numbers as failures but pre-listing shareholders who sell early are smiling.
Of course the best result from a market efficiency standpoint is a listing mechanism that delivers a fair price at listing for existing shareholders without either subsidising Wall St or paying a large fee to a promoter. This mechanism is a ‘direct listing’ which simply takes a private company into a public market and lets risk-takers (real buyers and real sellers with real money) determine the market clearing price. This was Spotify’s approach and everybody except Wall St and the SPAC promoters were smiling.
Do you like what you read? Then subscribe to our blog below…
Socialism fails once again in distributing the Covid vaccine
Reuters headline: “New York and Florida tell hospitals to dispense vaccine faster or lose supply” Jan 4 2021 Which of the following would you expect to see during a pandemic? A. Unused vaccine serum sitting idle; or B. Shortage of vaccine supply It would seem that the natural tendency would be toward B – that […]
Covid Notepad 3…plus a comment on Brexit
If there was one thing that was certain to flow from the Covid-19 pandemic, it is the volume of fascinating new research into the way people and governments react to the danger that the virus creates. You may recall that early on in the crisis there were dire predictions of breakdown in the health systems’ […]