Mark Thursday 19th May 2011 as the turning point. Two of the most closely watched companies IPOed -> LinkedIn was underwritten at $45/share, opened at $85 (%86? %87? I don’t know) and touched $120, or up 160% at one point. Glencore, on the other hand, opened at 530p, struggled to touch 550 (when analysts were calling a 5-10% pop) and has since been flirting around the underwritten level.
LinkedIn’s emphatic price action stirred the new media – tweets, blogs and an incessant stream of comments on facebook from new experts on tech sector. The noise aside, I liked this Buttonwood column on the rational man
AS LinkedIn closes its first day of trading on a valuation of 36 times sales, some of us can feel a wave of nostalgia coming on. Restricted float? Yep. Only 10% of the stock was on offer. New valuation method? Check. The FT says the stock is valued at “more than $100 per user”. Remember “price-per-click” and all that nonsense? It is possible that your blogger is listed as one of those users; I had to join once to try and track down the landlord of some noisy neighbours. The revenue LinkedIn has (and will) generate from me is zero, save if it sells my name on a mailing list in which case the purchaser of that list will face a disappointment.
Back in 1999 and 2000, of course, it was argued that dotcom mania wasn’t a bubble because investors were rationally pricing in the future growth prospects of the companies concerned.
But who are these rational men? The London Times today reports that Harold Camping, a former engineer and radio preacher, is predicting that the world will end tomorrow (rather a blow for those who bought LinkedIn shares) after a massive earthquake in New Zealand. All this was forecast in the Bible, Mr Camping has calculated, written a couple of thousands of years before New Zealand was discovered by Europeans and given that name. Some calculation.
Now, of course, these kinds of eccentrics come around quite regularly. More alarming was the paper’s report that
30 to 40 per cent of (Americans) regularly tell pollsters that the Bible contains a specific timetable for the end of the world
If you believe that, a price-per-user ratio of $100 may seem quite reasonable. Now some academics would argue that there may well be naive investors in the market but they merely provide the cannon fodder for the smart money that drive prices back into line. But Sir Isaac Newton also thought he could calculate the end of the world by analysing the Bible text. He also lost a fortune in the South Sea Bubble.
So if one of the smartest men in history can be that irrational, what does that say about the rest of us?
Indeed, what does that say about the rest of us. Brings me to my topic du jour, du mois, de l’annee – how is democracy rational or optimal? Consider this treatment by Bryan Caplan, the gist of which is this:
The data — along with personal experience — have convinced me that the political scientists are right — no matter how much you know about a voter’s material interests, it is hard to predict how he is going to vote. In contrast, if you know what a voter thinks is best for society, you can count on him to support it.
Before we can infer that the policies that are best for society will actually prevail, however, we have to add the very assumption I am challenging: that the beliefs of the average voter are true. If his beliefs are false, his good intentions lead him to support policies that are less than optimal, and possibly just plain bad.
In other news, 1 in 5 Americans think the Sun revolves around the Earth. Trust these people to run economic policy? No can do.
(oh by the way I think both Glencore and LinkedIn price actions point towards a frothy market ripe for a correction)