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The Economics of Facebook, and 'The Hacker Way'

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aTao
911099.  Wed May 23, 2012 1:37 am Reply with quote

Apart from possible legal definitions (of what constitutes licensed gaming/gambling) shareholding (and buying/selling) is most certainly gambling. But there are 2 very significant differences between that and casino/bookies game play. First is the expected win (odds * win probability) are positive whereas, for example, fruit machines are capped at 70% payout (an expected loss). Also the definition of "win" is slightly blurred, is "more than your money back" a win or must you "better inflation", all compared to other investment strategies (keep it under the mattress, spend it while you can or bank investment accounts).

 
Alfred E Neuman
911102.  Wed May 23, 2012 2:17 am Reply with quote

The big difference between horse racing and the stock exchange is that with horse racing, you know that there will be a winner in every race, whereas the stock exchange has no such certainty.

 
Neotenic
911108.  Wed May 23, 2012 3:08 am Reply with quote

Quote:
But if these companies didn't exist, would the financial institutions just have brushed things under the carpet, and carried on merrily mis-selling?


In a word. No.

These parasitic companies only crawl out of the stinking shitpile once they have a clear, easy scenario to work with, which may have affected enough people too stupid to figure out that they can just as easily make claims themselves, without having to hand over anything up to (and sometimes over) a third of the compensation to a third party.

None of these companies were lobbying against any injustice, or inherent unfairness in any given product's T&Cs - they just sat and waited until after major providers had already started significant compensation schemes.

If nothing else, it is entirely in the interests of these companies for there to have been potential mis-selling, as if there is no blame, they can make no claim.

I swear, if I could go back in history and make one change to the English language, it would be to manipulate it so the words we use for 'blame' and 'claim' don't rhyme.

Quote:
Sorry, though, no guarantees. It's STILL a gamble. Some is less risky than others, but there are still winners and losers.


Just to pick up on this general theme running through several other posts on the thread - I think I would just say 'welcome to life'

Nothing is guaranteed, even outside the financial realm. You can pop out to the shops, and there's absolutely no guarantee that you won't be spread thinly over the high-street by a removals truck suffering brake failure.

Everything we do carries with it at least some risk of life-changing catastrophe - but we either ignore or accept those risks because otherwise we'd all be lightly crazy hermits swaddled in protective clothing. And, indeed, most things that can be even remotely described as 'fun' carry even greater risks of calamity.

And that's because risk is fun. That's why we find ourselves laughing on the pavement if we've had a close call crossing the road in front of a car whose speed we have dramatically underestimated.

But, no matter what we do, or how we do it, risks can never be completely mitigated away to nothing. Investing your hard-earned money may well be described as gambling - but if we are going to include such transactions as home-buying or T-Bills, that does make the definition loose enough to be able to encompass pretty much all of human activity.

 
Neotenic
911117.  Wed May 23, 2012 3:40 am Reply with quote

Quote:
Also the definition of "win" is slightly blurred, is "more than your money back" a win or must you "better inflation", all compared to other investment strategies (keep it under the mattress, spend it while you can or bank investment accounts).


Quote:
The big difference between horse racing and the stock exchange is that with horse racing, you know that there will be a winner in every race, whereas the stock exchange has no such certainty.


I think I would say, instead of either of these, that the major issues with comparing stock-picking with gambling on the horses is that the definition of 'win' is far more elastic and not everybody 'wins' or 'loses' at the same time.

Even at the most brutally simplistic level, there are two main investment objectives that people will choose between - investing for income, or investing for growth.

If you are investing for income, you are less concerned about exactly where the share price of your chosen stock is in relation to the price that you bought than you are about the expected and actual level of dividends you receive from owning the stock. And, broadly, those concerns are reversed if you are looking for growth (although, naturally, you can also re-invest any dividends into more shares too).

And, as I have said before, there isn't really a clear point in time when investors can be seperated into 'winners' and 'losers', as there is with horse-racing - and even if there was, it is most certainly not zero-sum. The amounts won by 'winners' does not always have to be matched by amounts lost by 'losers'.

Of course, the winner/loser thing is more readily applied to derivative trading, and you won't hear any argument from me about whether a lot of that activity is straightforward gambling - just that I believe it is a mistake to describe all stock market invesment in those terms.

In the stock market, additionally, yesterday's losers can well become tomorrow's winners.

A common scenario that occurs is that an unexpected event causes the share price of any given stock to completely tank. A good example here would probably be BP, whose share price pretty much halved during the Gulf of Mexico oil spill.

What causes a share price to collapse? Simple supply and demand. The stockbrokers we talked about earlier are flooded with 'sell' orders, but do not have enough 'buy' orders to match them with, so the price at which they are offered gets lower and lower until buyers can be found.

The people who bought when the share price was above 5.50 and sold when it fell through 3.50 the summer of 2010 are almost certainly losers - but in order for that sale to happen, someone else had to buy them. That someone had to believe that the company wasn't going to collapse completely, because if it did, the shares would be worthless and unsellable, and they also had to believe that it wasn't going to fall further and then stay there.

And they were right. Barely six months later, the price had gone from an absolute low of just over 3.00 to around the 5.00 mark. So, someone throwing 100,000 at people desperate to sell their stock at what would prove to be the lowest ebb would have been able to collect a 66,000 profit by selling around Christmas.

However, in the peverse logic of the stock-watchers, buying BP at 3.00 would have been regarded as a riskier proposition than buying it the day before the Deep Water Horizon explosion, when the share price was exploring new heights.

 
exnihilo
911148.  Wed May 23, 2012 6:30 am Reply with quote

Oceans Edge wrote:
Sounds all nice and sensible ... so long as you hang onto it long enough you'll make money

Sorry, though, no guarantees. It's STILL a gamble. Some is less risky than others, but there are still winners and losers.


Not really. I bought shares around ten/twelve years ago for $800 which are now worth $32,000. The exchange rate at the time meant that was 400. I've spent that on a good dinner, so in the unlikely event that the company ceases to exist and my shares are valueless I've really not lost anything. Hell, even if they tank back down to the original value, I've still not lost anything because the exchange rate has changed. What that was was a sensible way to invest a small amount of money I wasn't using for anything else which, because I didn't sell when the shares went up by 20 cents has worked to my advantage - precisely because I was holding them and not trading them.

The same is true of your land or your house. Assuming you didn't buy in an area noted for spectacular coastal erosion or in the caldera of a volcano and barring it being destroyed in a nuclear blast if you hold it long enough the value will come back up. Not might. Will. And if that's gambling then so is getting out of bed every morning.

 
Neotenic
911198.  Wed May 23, 2012 9:04 am Reply with quote

Land, and particularly property, prices/values is a curious area, for a number of reasons. But mainly because it is where basic human needs and opportunities for investment compete for the same, finite and largely illiquid, stock.

Everybody needs somewhere to live. And, ideally, people want somewhere nice to live - a place where you don't have to wear a stab vest to put the bins out, for example.

But, for a variety of reasons, the stock that we have to provide for these needs has come to be viewed, especially in the US and the UK, as a conduit to riches.

It's clear to anyone that, even with the recent downturns in values, property prices have accelerated far faster than almost anything else. My parents bought the four-bedroom, detached house I grew up in for an amount of money that would barely cover the proportional value of the kitchen and bathroom of my own 2 bed mid-terrace.

There are certain natural pressures, not least a growing population all wanting to live in nice areas that have stayed broadly the same size. And proximity to 'good' schools is also a significant factor.

But on top of these simple suppy-and-demand pressures, we have another, relatively new, group of people competing for the same properties, clutching a buy-to-let mortgage. And my personal belief is that it the explosion in this area that helped push prices beyond 'blimey, that's a bit steep' into total lunacy. And it is the realisation that, in some areas, you'd have to be a lunatic to pay those prices that has set valuations tumbling by as much as a quarter, or even a third.

And, in a curious symmetry to problems I have already talked about, the key factor here is leverage.

Because, by and large, when people 'invest' in a buy-to-let property, they are effectively taking a heavily leveraged position. They 'buy' a house, but will rarely put more than 10-20% in themselves. The rest will be debt. And as that debt will, if it all works out, be serviced by the rental income from the property, it doesn't necessarily matter a great deal to the investor if the debt they take on is 200,000 or 300,000. Plus, 100% LTV buy-to-let mortgages were not exactly uncommon, particularly in 2005-07.

Property valuation is an odd beast at the best of times, but a great deal of the 'value' of any given property is computed from how much comparable properties in the area have sold for in the recent past. So a rising tide lifts all boats. You may have a dozen offers if you market a property at 250,000, but still get five if you do so at 300,000, because the BTL investors only have to find another 5,000 to get the same deal on the mortgage, whereas a resdential buyer has to figure out how they're going to pay off the extra 50K capital and attending interest.

You don't have to be a genius to figure out what number goes into the estate agent advert.

Personally, I think we should be trying to sever the mental link that has been made, and re-inforced over the first half of the noughties, that residential property should be seen as general purpose investment vehicle for the mass market.

Were I in charge of setting policy for a day, I think I would cap the maximum loan-to-value ratio on a residential buy-to-let mortgage at 50%, tops. Maybe even lower.

I can certainly understand the appeal of investing in residential property, but the gains that are to be made come at the expense of people - families - that simply want somewhere nice to live where they don't have to choose between paying the mortgage and paying for dinner.

Sure, that avenue of investing should be left open, but people shouldn't be able to barge their way into it with nothing more than armfuls of debt. We are all, ultimately, poorer because of that.

 
suze
911223.  Wed May 23, 2012 11:08 am Reply with quote

Neotenic wrote:
Were I in charge of setting policy for a day, I think I would cap the maximum loan-to-value ratio on a residential buy-to-let mortgage at 50%, tops. Maybe even lower.


But that would cause a general fall in house prices. You and I might think this a jolly good thing too, but the Daily Mail wouldn't like it. And if the Daily Mail wouldn't like it, the government isn't going to let it happen.


Astonishingly, the IMF has recently commented that it considers British interest rates too high. I hadn't realised that it was actually possible for them to be any lower, but apparently it is and I suppose I had better prepare myself for it happening.

If it does happen, then keeping my money in the bank will become even more pointless than it already is. As if the interest rate didn't make it clear enough that the bank doesn't really want the money, some institutions are actually turning deposits away. (Husband discovered this when he tried to transfer an old ISA into this year's ISA provider, but was told that the new provider doesn't accept transfers. It appears that the new provider isn't actually all that interested in having some of his money, but it is interested in having lots of peoples' details for marketing purposes.)

Accordingly, we're now beginning to think about something we'd said we wouldn't do again, and buying a BTL property. If the Exchequer would really rather that we didn't do that, then it needs there to be some other way to make a return that isn't way below inflation.

 
Neotenic
911233.  Wed May 23, 2012 12:50 pm Reply with quote

Quote:
But that would cause a general fall in house prices. You and I might think this a jolly good thing too, but the Daily Mail wouldn't like it. And if the Daily Mail wouldn't like it, the government isn't going to let it happen.


Yeah, I'm certainly not averse to pissing off the Daily Mail, and making sure any particular paper is not pissed off is a thoroughly absurd way to run a country.

Indeed, we have been thoroughly indoctrinated to believe that a fall, any fall, in the value of our homes is as calamitous as having a satellite fall out of the sky on to it. Even when the market is so over-inflated it is amazing that houses haven't started bursting at the seams.

We were idly looking at other places the other day, as we're fairly sure that we don't want to live in this house forever and both of us think it would be delightful to live in Canonbury, or thereabouts. But, with it being hard to even find flats for much less than a million, that may be out of our reach for some considerable time. And - by any standard - the notion that a fairly unremarkable property in a relatively pleasant area is really 'worth' seven figures is ludicrous.

Clearly, the cycle has to be broken. And in order for that cycle to break, there will have to be casualties. There will have to be people that bought at what proved to be the top of the market that will find themselves facing astonishing levels of negative equity. The question, really, is whether we are able to gently let the air out, or if it all has to go in one big bang.

Of course, it would be horrible for anybody to be in that particular position - but we are also continually reminded about how things have to be done for the good of society as a whole - and is it really right that we protect a small proportion of the population from an unpleasant scenario, if the cost of protecting them is that everyone that aspires to own their home ends up with hundreds and thousands of pounds worth of debts?

Not only that, but who really benefits from these titanic transactions? Sure, individual investors may benefit from the occasional individual transaction, but banks and other mortgage providers get to reap the enormous interest payable on everyone borrowing half a million for 25 years, and estate agents get to pocket ever larger commissions for every property that changes hands. That sounds brilliant, if we want to run our housing market for the benefit of bankers and dickheads in Foxtons Minis, but that doesn't seem to me to be quite what we are looking for.

Breaking the cycle will mean short term pain for some, but will reap long term benefits for all. Isn't that, really, a price worth paying?

 
suze
911248.  Wed May 23, 2012 1:28 pm Reply with quote

Neotenic wrote:
Yeah, I'm certainly not averse to pissing off the Daily Mail, and making sure any particular paper is not pissed off is a thoroughly absurd way to run a country.


Oh, I agree entirely. But it's less clear that the man behind the big black front door does.

As it goes, he can afford to upset the Daily Mail more than the other lot can - that organ is highly unlikely to switch its support to the Labour Party whatever happens.

OTOH, neither major party will consider that it can afford to upset The Sun - and that excuse for a newspaper is equally obsessed with house prices.


Neotenic wrote:
That sounds brilliant, if we want to run our housing market for the benefit of bankers and dickheads in Foxtons Minis, but that doesn't seem to me to be quite what we are looking for.


Careful now, you're starting to sound like Vince Cable ...

Given that the bankers and dickheads constituency undoubtedly votes Conservative as a body, is there any realistic chance of the current government acting as you advocate?

Sadly, I fear not. And you can be sure that if it were a Labour government that took the bold step, the Conservatives would be absolutely up in arms about it.

 
exnihilo
911253.  Wed May 23, 2012 1:42 pm Reply with quote

Am I the only one who is simply not convinced by the idea that the Government is quite that in thrall to the papers?

Not least because it always seems to translate into 'things I approve of that get done because other people approve of them are democracy in action, whereas things I approve of that don't get done because other people disapprove of them is the papers exerting control.'

 
Neotenic
911268.  Wed May 23, 2012 2:11 pm Reply with quote

No, I agree with you, ex - I don't believe that Cameron sits down with a White Paper and wonders "Now, what will Dacre think of this?".

At best, it is a cartoonification of the process based on the broadest of stereotypes.

Having now had some small part in the process of the development of certain policies, I can say that the amount of time spent considering what the press would say about it totalled cock-all.

 
suze
911288.  Wed May 23, 2012 4:36 pm Reply with quote

As regards Dacre, I think I probably agree with you. But as regards Murdoch ...?

Neotenic wrote:
I can say that the amount of time spent considering what the press would say about it totalled cock-all.


I'm pleased to hear so. But if it were cock-all throughout the process, the government wouldn't have media advisors - and every PM from Callaghan onwards has had such things.


Last edited by suze on Wed May 23, 2012 4:38 pm; edited 1 time in total

 
brunel
911290.  Wed May 23, 2012 4:37 pm Reply with quote

Back on the topic of Facebook's IPO, we are now seeing some discontented investors launching legal action against Facebook and the main underwriters (Morgan Stanley is currently facing the most criticism). http://uk.reuters.com/article/2012/05/23/uk-facebook-lawsuit-idUKBRE84M0RJ20120523

The chief complaint is that Facebook's senior management revised the figures for estimated future advertising revenue growth sharply downwards, because the potential for advertising revenue from mobile platforms is negligible at the moment.
Now, the accusation is that Facebook only passed that data onto the underwriters instead of making that information publicly available; the underwriters and independent analysts, in turn, are accused of deceiving some investors by only disclosing those revised figures to selected investors, rather than, as required by law, issuing those figures to the wider public.

Either way, Facebook is now facing several major investigations into its IPO, with the US Senate Banking Committee and the SEC both looking into the whole affair.

 
Neotenic
911397.  Thu May 24, 2012 4:48 am Reply with quote

Quote:
As regards Dacre, I think I probably agree with you. But as regards Murdoch ...?


I can't help but think that rumours of Murdoch's influence, on governments from either side of the political divide, have been greatly exaggerated.

Quote:
But if it were cock-all throughout the process, the government wouldn't have media advisors - and every PM from Callaghan onwards has had such things


I think that's getting the involvement of media advisers in government backasswards.

It seems to me that the job of such advisers, and press secretaries, is to present the government's ideas to the media in the best way possible. Not the other way around.

Quote:
Back on the topic of Facebook's IPO, we are now seeing some discontented investors launching legal action against Facebook and the main underwriters (Morgan Stanley is currently facing the most criticism).


Yes, this is all blackly humorous.

Of course, if Facebook's share price had done what many (myself included) had thought it would do and keep climbing, we probably wouldn't be seeing these lawsuits materialise at all.

However, we would probably be seeing rather more of those relating to the technical failures that led to delays in buy orders being fulfilled.

I tend to believe that these proceedings have little chance of success - and they're just as likely to be hoping for a shut-up-and-go-away settlement as they are for a day in court over this.

I can't help but think that if you are basing your entire decision to invest or not on the basis of rather intangible revenue forecasts alone, you probably shouldn't be investing in the first place. But, I expect that this is a reason that has been found to justify a court case, rather than the core reason for the ire of the investors.

I think it is equally likely that a number of the investors that have filed lawsuits are those that bought themselves a fat stack of shares using short-term borrowed money, with a view to punting them on within days and taking a quick profit from the feeding frenzy. But the fall in price means that not only are they not going to make any profiit, the value of the shares will not even be enough to pay back the loan and interest payable on it. I think that is a far more likely motive for legal action than someone tweaking figures that were, really, little more than educated guesses anyway.

Whether or not Facebook and their advisers have been guilty of drinking their own Kool Aid, and putting the shares on the market at an over-optimistically high price is another matter - but I don't think anyone was forced to buy those shares at that price, were they?

 
djgordy
911433.  Thu May 24, 2012 8:57 am Reply with quote

Neotenic wrote:

But, for a variety of reasons, the stock that we have to provide for these needs has come to be viewed, especially in the US and the UK, as a conduit to riches.


Speaking as someone who has made a lot of money from investing in property: I worked hard, saved my money instead of spending it on fags, booze and drugs and invested it in order to provide for myself later in life. If I had invested in a pension I wouldn't get any benefit from it until I retired unlike now when I get an income from rent. Also, anyone who invests in a pension loses access to the capital whereas I can sell a house every 5 years or so and get a big wodge of money in the bank. Also, income from a pension ceases when the investor dies whereas I can leave the capital in my property to a relative/charity/terrorist group.

 

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