About trading and value

Tuesday, 15 January, Year 5 d.Tr. | Author: Mircea Popescu

Allow me to quote a bit of Warren Buffett, from the good old days before going insane, losing all his money in idiotic investmentsi, supporting Obama, donating to Bill Gates' Foundation of Evil and all that unfortunate stuff of the current millenium. In fact, no matter what happens we will always have the 1900s Buffett. So :

Henderson Brothers, Inc., the specialist in our shares, is the oldest continuing specialist firm on the Exchange; its progenitor, William Thomas Henderson, bought his seat for $500 on September 8, 1861. (Recently, seats were selling for about $625,000.)

Among the 54 firms acting as specialists, HBI ranks second in number of stocks assigned, with 83. We were pleased when Berkshire was allocated to HBI, and have been delighted with the firm's performance. Jim Maguire, Chairman of HBI, personally manages the trading in Berkshire, and we could not be in better hands.

This is here specifically to show to anyone who has a mind of complaining about some imaginary "500 dollars" cost of registering on MPEx. There's your 500 dollars.

In two respects our goals probably differ somewhat from those of most listed companies.ii First, we do not want to maximize the price at which Berkshire shares trade. We wish instead for them to trade in a narrow range centered at intrinsic business value (which we hope increases at a reasonable-or, better yet, unreasonablerate). Charlie and I are bothered as much by significant overvaluation as significant undervaluation. Both extremes will inevitably produce results for many shareholders that will differ sharply from Berkshire's business results. If our stock price instead consistently mirrors business value, each of our shareholders will receive an investment result that roughly parallels the business results of Berkshire during his holding period.

This part is iffy. I absolutely agree on the principle, which is to say, I do not wish to maximize the price at which S.MPOE trades either. Most of my actions which strike "conventional" investors, traders and comentators as nutty, such as the original scheme through which I allocated shares,iii, the structuring of ulterior IPOs, guarded comments made on the topic of S.MPOE share price recently and so forth are clearly alligned with this general principle.

The iffy starts with "intrinsic business value". The point of fact is that MPOE isn't in any way Berkshire. Not in the sense that MPOE/MPEx's half million BTC market cap is so very much less than Berkshire Hathaway's 200 billion dollar market cap, but in the sense that it is so very much more. This may obviously sound like just more nuttery, and that sound may last until you stop and consider the relative weights in their relative spaces - because no, Berkshire never was and never could possibly be worth 2% of all fiat that will ever be printed.

Moreover, while Buffett made a name for himself through consistently being reasonable (and not through consistently being right!) in spite of widely held agreement in the fiat drama world (usually called Academia in that space) that he doesn't matter, isn't nice and shouldn't be quoted, he never had the advantage of operating in the kidnergarten. It is, I submit, a lot easier to be a star in BTC than it is in fiat, simply because so many more intelligent people (that aren't computer programmers!) are involved with the latter as opposed to the former.

To these two considerations we have to add a very specific problem of Bitcoin itself. In general in a fiat world the aggregated market cap of all listed companies is by and large equal (taking a degree of magnitude approach to equality) with the sum of all money available. This is so for the very obvious reason that there's a link between the products and services which back the value of money and the corporations making those products and services which back the value of shares. Any imbalance between these two is more or less immediately resolved, usually through stock appreciation in one direction and by inflation in the otheriv.

Problems start there : bitcoin has no inflation, and thus that mechanism described above is unbalanced. As the value of listed companies grows, and it inevitably will, at some point it will exceed the total Bitcoin in circulation, just as inevitably. This means that in the - probably not so distant - future, the principal role of Bitcoin-to-fiat exchanges will be to work as pumps, closing the circuit formed between Bitcoin share sellers and Bitcoin share buyers. Obviously this pump is not particularly efficient, nor is it free of cost. As a result, there will exist "no less than one commodity or security of inelastic volume which is overvalued due to reservation demand, ie one scarce good which is money". S.MPOE looks like it is taking exactly that role, ie becoming monetized, and this throws a monkey wrench of gargantuan proportions in the entire "intrinsic business value" paradigm. What is the "intrinsic business value" of the business of the seashell which makes the conches used in trade ?

I make no representation to have resolved, be in the process of resolving, or even have any credible hope of resolving that last question, by the way. Yet, none of these disclaimers make it go away : unlike the way things work in Academia, in business simply disclaiming a problem on the grounds that it is too hard does nothing to deliver one from it. (This, incidentally, is why people of any sort of import in this world so squarely despise academics.)

Second, we wish for very little trading activity. If we ran a private business with a few passive partners, we would be disappointed if those partners, and their replacements, frequently wanted to leave the partnership. Running a public company, we feel the same way.

Our goal is to attract long-term owners who, at the time of purchase, have no timetable or price target for sale but plan instead to stay with us indefinitely. We don't understand the CEO who wants lots of stock activity, for that can be achieved only if many of his owners are constantly exiting. At what other organization - school, club, church, etc. - do leaders cheer when members leave? (However if there were a broker whose livelihood depended upon the membership turnover in such organizations, you could be sure that there would be at least one proponent of activity, as in: "There hasn't been much going on in Christianity for a while; maybe we should switch to Buddhism next week.")

This is obviously an excellent point, and it goes nicely with the earlier one : just as high share prices aren't valuable in and of themselves, high trade volumes aren't valuable in and of themselves.

Certainly a very difficult point to swallow, especially among a youth trained to believev that fame equals fortunevi (and more generally, that group approval means you're right) and that traffic volume means revenue (indeed, by their count Grand Central Station is the most successful jewelry shop in all of New York). Nevertheless Facebook (the current repackaging of the already venerable Myspace scamvii ) is not an investment, for the very simple reason that it has no value. Movement by itself, size by itself are poor substitutes of utility.

It is utility and utility alone which yields value.

  1. What's he out, 10bn on those index puts ? All in all one third of his net worth in 2008/2009 ? []
  2. He notably told Maguire that "if the next trade happens in about two years I will consider this a success", much to that trader's giddy, intoxicating glee. []
  3. Through which fortunes were made, seeing how you could buy for 2`000 or 9`000 something that meanwhile - a few months to a year later - trades at 60`000 and over.

    This may be criticised even on a fundamental basis as creating rather than resolving market inefficiencies (to which I present the unassailable defense that you have to start somewhere, you can't simply "increase market efficiency" in a market that does not, at all, exist - as BTC finance did not exist at that time), but in any case does not jive with the stock price maximization notions shared by pretty much anyone else involved from the owner's, director's or operator's perspective in any BTC listed company.

    Moreover, I have recently repeated the offense, with the S.BBET IPO, which was clearly not designed to maximize price, but instead to favour discovery.

    This fundamental difference of approach, between wanting the share price "to be high" on one hand and wanting the share price to be "as close to reality as possible" on another is inexplicable to me. I don't understand who in his right mind would want the price to be high just for the sake of it being high, and it seems to me the only reason people think this way is because they haven't actually taken the time to think at all. []

  4. Which would seem to imply and I do believe it implies that inflation is by no means a point of governmental policy, but simply a value established in the marketplace towards which the government, willingly or not, will always converge, much like the butcher in that koan who did not cut the beast but simply followed the cuts already present in its flesh.

    In this sense market-contrarian policies, either of "fighting inflation" such as have been traditionally recommended by the IMF and other "international experts" in various 2nd hand, submissive and dependent countries around the world for close to a century or "generating inflation" such as have been applied by the 1st hand, dominant and exploitative countries once they ended up in the same sort of trouble are equally pointless and equally dysfunctional.

    The debate about which sort of dysfunction "is right" has been raging for decades and will continue to rage unabated and unresolvable for as long as the problem is being represented in that broken frame. Neither is right, the economy just needs to balance itself. []

  5. Yes, I do mean trained to believe. As the adage goes, "In any sort of intellectual contest it's an enormous advantage to have opponents who have been taught that it's useless to even try". []
  6. Ask people aged around twenty to make, out of their own head, a list of the richest twenty people in the world and then see how many people on that list are rich and how many people on that list are merely "famous", in the very vapid "been on TV" sense of this fame. Popfamous. []
  7. For my curiosity, do you know how much it was bought for, how much it was spun off for, and who booked that loss ? []
Category: MPEx
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4 Responses

  1. More good stuff:

    One of our goals is to have Berkshire Hathaway stock sell at a price rationally related to its intrinsic business value. (But note "rationally related," not "identical": if well-regarded companies are generally selling in the market at large discounts from value, Berkshire might well be priced similarly.) The key to a rational stock price is rational shareholders, both current and prospective.

    If the holders of a company's stock and/or the prospective buyers attracted to it are prone to make irrational or emotionbased decisions, some pretty silly stock prices are going to appear periodically. Manic-depressive personalities produce manic-depressive valuations. Such aberrations may help us in buying and selling the stocks of other companies. But we think it is in both your interest and ours to minimize their occurrence in the market for Berkshire.

    To obtain only high quality shareholders is no cinch. Mrs. Astor could select her 400, but anyone can buy any stock. Entering members of a shareholder "club" cannot be screened for intellectual capacity, emotional stability, moral sensitivity or acceptable dress. Shareholder eugenics, therefore, might appear to be a hopeless undertaking. In large part, however, we feel that high quality ownership can be attracted and maintained if we consistently communicate our business and ownership philosophy-along with no other conflicting messages-and then let self selection follow its course. For example, self selection will draw a far different crowd to a musical event advertised as an opera than one advertised as a rock concert-even though anyone can buy a ticket to either.

    Through our policies and communications-our "advertisements"-we try to attract investors who will understand our operations, attitudes and expectations. (And, fully as important, we try to dissuade those who won't.) We want those who think of themselves as business owners and invest in companies with the intention of staying a long time. And, we want those who keep their eyes focused on business results, not market prices.

    Investors possessing those characteristics are in a small minority, but we have an exceptional collection of them. I believe well over 90%-probably over 95%-of our shares are held by those who were shareholders of Berkshire or Blue Chip five years ago. And I would guess that over 95% of our shares are held by investors for whom the holding is at least double the size of their next largest. Among companies with at least several thousand public shareholders and more than $1 billion of market value, we are almost certainly the leader in the degree to which our shareholders think and act like owners. Upgrading a shareholder group that possesses these characteristics is not easy.

    Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers. At $1300, there are very few investors who can't afford a Berkshire share. Would a potential one-share purchaser be better off if we split 100 for 1 so he could buy 100 shares? Those who think so and who would buy the stock because of the split or in anticipation of one would definitely downgrade the quality of our present shareholder group. (Could we really improve our shareholder group by trading some of our present dear-thinking members for impressionable new ones who, preferring paper to value, feel wealthier with nine $10 bills than with one $100 bill?) People who buy for non-value reasons are likely to sell for non-value reasons. Their presence in the picture will accentuate erratic price swings unrelated to underlying business developments.

    We will try to avoid policies that attract buyers with a shortterm focus on our stock price and try to allow policies that attract informed long-term investors focusing on business values. Just as you purchased your Berkshire shares in a market populated by rational informed investors, you deserve a chance to sell-should you ever want to-in the same kind of market. We will work to keep it in existence.

    One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as "marketability" and "liquidity", sing the praises of companies with high share turnover (those who cannot fill your pocket will confidently fill your ear). But investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pickpocket of enterprise.

  2. Mircea Popescu`s avatar
    Mircea Popescu 
    Tuesday, 15 January 2013


  3. Bugpowder`s avatar
    Tuesday, 15 January 2013

    I believe that Buffett is now up on those short put contracts using Black Scholes valuation models, and WAY up if they were to expire at current index levels. They recently unwound a fraction of the contracts for a $222 million gain.


    "In this case, Berkshire, which had received $647 million in premiums in writing the contracts, paid $425 million to unwind them, resulting in the latest-quarter gain. But Buffett notes he also got the free use of the premiums over the three years the contracts were in effect. Buffett views the use of such so-called float as one of the key benefits of the insurance business, because it allows him to invest policyholder funds for Berkshire's benefit."

  4. Mircea Popescu`s avatar
    Mircea Popescu 
    Tuesday, 15 January 2013

    Yeah, the great advantages of being buddies with the political leaders in an inflation based totalitarian state : they fix your bad business bets for you.

    I stand unimpressed.

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