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If it stays at $46, that's a gigantic fuck up. They left a billion dollars on the table, and that's borderline breach of fiduciary duty.

Of course, we have to wait and see what it settles at, and it's a little premature to heap scorn just yet. But the initial reaction is it looks like they overreacted to the Facebook IPO debacle (in my book, Facebook did the best thing possible for the company and extracted as much value as possible from the public markets --- and the value buyers didn't get screwed, given that a year later it's trading at ~20% above the IPO price.).

I believe you have the logic backwards here.

Facebook was the fuckup because they priced correctly and all the buddies of the underwriters didn't make bank on the IPO. Twitter is back to the old system and nobody will be complaining this time around.

I suppose it depends on who you are trying to please. If you are Twitter, it's a major loss.

If you give a shit about bankers (most of us do not), then you win.

But the bankers come up with those magical "buy/hold/sell" recommendations that everyone else listens to and panic-sells when their advice says so. Or "oops, they missed our magically predicted revenue by one penny per share". It's all part of the game.

Sell side analyst recommendations are a complete joke. They are basically trailing indicators (i.e. price drops and then the sell recommendations come out). I don't think anyone takes them seriously.

I saw an interesting article about GOOG recently that had explicit instructions about where to buy/sell and how long to hold. I laughed.

Which says to me that bankers are probably still holding a lot of TWTR. If that doesn't change short-term, it could poison the social network.

I believe going public poisons any company. CEOs change their vision from long-term to insanely short-term. Gotta make those quarterly numbers or they're screwed.

There have been a few exceptions to this, Apple being the most famous one. Facebook was on the same track but the SEC rules about share ownership forced their hand.

Amazon has pretty weird numbers, and is public.

I think Amazon is another outlier, as we've already discussed:


Notable pull quote: "It's important to note that if any other company spent until their EPS was negative, investors would /flip/. Amazon is playing with razor thin margins while trying to scale up a platform to end all platforms that we might someday use for everything without thinking about it."

So again, like Apple and Facebook, everyone knows the CEO is playing the long game and doesn't give a crap what the stock price is.

It depends on who holds the stock, and how they're voting. That's pretty clear. When bankers buy a company anticipating a highly profitable return via their models and slam that expectation into the leadership like a floppy do... you know what happens.

Can someone who knows about these things explain why no one else does auctions like Google did? I mean, these guys are supposed to be about markets, right, so why the heck is the price decided by some kind of "central committee"?!

I think the Google IPO was a bit unique where they kind of gave Wall Street the finger and said "we'll do it our way, thanks". They pissed off a lot of bankers but I don't think Sergey and Larry really cared.

Haven't seen a situation or company like that since.

Google's auction didn't work, they marginalized wall st. and the banks ended up rigging the bidding. While it only popped 20% on opening day, the stock was up 4x in a matter of months.

When you say "didn't work", what do you mean? "Rigging the bidding" sounds like a big deal - where is this covered?

I have no actual idea, but I saw a comment the other day to the effect that:

Choosing a good price is a) hard, because of the due diligence, and b) expensive, because if you chose wrongly, you lose money (in an auction, this is called the winner's curse.) So the cost of estimating the price before the shares are on the market needs to be priced in to the initial sale price.

Probably doesn't explain a 100% jump though, but in regard to the rich supposedly supporting free markets, I will remark that people's ability to be for things when they are applied to other people, and against them when applied to themselves, never ceases to amaze me.

I don't really know these things but as far as I can tell what Google did was something really unpopular that only what Google used to be could do: they only allowed the "right" VCs to invest to their conditions, and they were not interested to the reaction of bankers and alike, and everybody wanted the Google shares. Twitter was nowhere in such a kind of predominant position given that is in a weaker situation (it is not clear if it will ever make enough money to justify even the IPO initial price).

Because it works MUCH better. Google could have made much more money on its IPO if it used a sales team.

From the Bloomberg story, which sums it up:

“The company did everything to secure the most cash for itself while leaving some money for the IPO buyers,” said Josef Schuster, the founder of IPOX Schuster LLC, a Chicago-based manager of about $1.9 billion. “You need a pop at the opening to leave a good taste with everyone. They did a pretty good job managing the whole situation.”


I was pretty sure that the financial companies demanded massive bribes in exchange for orchestrating an IPO, but it's still amazing to see it admitted in such a blatant fashion.

Can you say for a fact that if they priced at $46 that people would have bought at $46? Markets are highly irrational.

What does it mean for a market to be "highly irrational"? Normally the term "irrational" is applied to actors, while "efficient" refers to markets.

Are you suggesting markets are not efficient? In that case, when can we expect you to become extremely wealthy from your inefficiency-proving strategy? (Claiming the EMH is false is equivalent to claiming that such a strategy exists.)

Incidentally, when an actor behaves irrationally in an efficient market, this happens:


I don't know if he is, but I would certainly suggest that markets are not efficient. Not even close. Google had a 40 billion dollar swing in valuation in a day last month. Were they really worth 40 billion more that day? Apple lost 300 billion in market cap in a matter of 6 months. Either they weren't worth that much at the peak, or they weren't worth that little at the bottom. There is no way you could ever convince me that Apple was efficiently priced at both ends (most likely neither end).

Knowing that the market is inefficient is not equivalent to knowing which stocks to buy or sell, or when to do so. It doesn't give you a magic formula, but it does give you some idea of what to look for.

FWIW, I have done pretty well picking stocks for myself, but I'm far from what I would consider "extremely wealthy". That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it.

You seem to be using a definition of "efficient" that has some sort of moral or intuitive meaning. That's not the relevant definition. It's really something more like "the market will not exhibit large-scale persistent arbitrage opportunities", which is why showing the market is inefficient pretty much by definition requires you to produce a method to consistently make substantial quantities of money by exploiting the arbitrage opportunities you found.

Market efficiency is not a moral concern; it's more like a physics observation.

In fact trying to understand economics with morality or some other form of normative claim is a huge and quite pervasive mistake that destroys people's ability to understand it before they even start trying. It's a machine. What we do with it may be moral or immoral, but the market itself is all but a natural force.

According to investopedia[1] - An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.

At the very least, if not me, Warren Buffett has shown that the market does in fact exhibit large-scale persistent opportunities. You just have to be patient. I don't think "arbitrage" is actually the relevant term here. It has a very specific meaning that isn't simply a stock being mispriced. Really though, the market offers deals all the time.

FWIW, I don't have Buffett's track record, but I currently have 20 stocks in my portfolio most of which I've held for several years. Of those, 19 have made money and 1 has lost a small amount, and on the whole I've beaten the market nicely. I could just be written off as lucky, or as about to lose lots of money, but how do you explain Buffett? He has a track record of consistently beating the market by wide margins for 50 years. Seems like that wouldn't be possible under EMH.

[1] http://www.investopedia.com/terms/e/efficientmarkethypothesi...

"Opportunities" is not "arbitrage". The value of an item going up over time is not disproof of a market's efficiency; efficiency is a point-in-time characteristic, not an across-time characteristic. A market is not required to be psychic to be efficient. It especially doesn't pertain to the case where someone generates value; Warren Buffet is not a passive purchaser of stocks, Warren Buffet seeks out stocks where he can generate value in some manner with better management.

As for your positive returns, the easiest explanation is that you're in a green square on this graph (suitably updated): http://www.nytimes.com/interactive/2011/01/02/business/20110... (Read what the graph is carefully, most people misinterpret it at first glance.)

>According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices...

...on average. Which is what makes "beating" the market, over enough time, impossible.

But we know there are pricing discrepancies and information asymmetries in finite periods of time because we see them every day.

That's one of the main problems with the efficient market hypothesis, actually.

The EMH is false for values of "efficient" that are interesting, and the values of "efficient" for which it might be true are boring and useless in the grander scheme of things.

A lot of needless bad blood enters discussions because everybody interprets the word "efficient" as they please.

> That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it.

But I'd be selling it, and you can find out how by buying my book for the low, limited time price of three payments of $99.99. If you act now, we'll also throw in this great place-mat shaped like a $3 bill, and a ring-tone for your phone that sounds like money. Just pay separate shipping and handling. <insert three thousand word disclaimer here>

Are you suggesting markets are not efficient? In that case, when can we expect you to become extremely wealthy from your inefficiency-proving strategy? (Claiming the EMH is false is equivalent to claiming that such a strategy exists.)

What if I were able to prove that markets are inefficient because efficiently pricing securities is an NP-complete problem? Well, sure, maybe a strategy exists, but if it requires solving an intractable problem then I'm not about to get rich off of my proof ;)

Yes, David Pennock has had these results for a while. The economist would merely argue that results which are computationally intractible are equivalent to information which does not exist. And the computer scientist would point out this doesn't mean markets can't approximate efficient with a high degree of accuracy.

I believe the counter argument to a money making inefficient market strategy is "I'm just a little guy and the big evil bankers won't let me make money".

> Markets are highly irrational.

That depends which recent Nobel Memorial Prize winner you believe.

In this world of quant-bots, I don't know how anyone can argue that we have a fully rational market.

My understanding is that much of the progress in economics has been merging economics with psychology to identify rational failures.

"Homo economicus" is still really important for macroeconomics. The reason for this is pretty simple: designing rich, large models is still hard to do and the practical limitations introduced by basing your assumptions on the idea that people act irrationally instead of rationally can make things too complicated to be of practical use.

So in microeconomics or small models, people can practically accept and implement these (pretty obviously true) ideas that people don't behave rationally. But in large scale macroeconomic models it's hard to do. It would certainly be a lot easier if people just acted like computers...

The issue is not just that models are hard. The claim of some economists is that while people behave irrationally, not everyone behaves irrationally all the time, so the issue is self-correcting as long as you have enough liquidity and participants in the market.

It's like the law of large numbers; while a single transaction may have a completely wrong price, a sufficiently large number will average the irrationalities out.

If people make biased (http://en.wikipedia.org/wiki/Bias_of_an_estimator) guesses you will still have a problem. I think that's often what's meant by "rational": that people, in aggregate, make unbiased guesses.

The truth is not so - people get irrationally exuberant or are afraid to cut their losses, etc. These are problems of statistical bias of their estimations - and the opposite is assumed in many (most?) economic models.

Most of the time it's like that, but sometimes you have a situation like nominal loss aversion/sticky wages where humans are very consistent about their irrationality and that irrationality has very important effects.



Simplifying models has always struck me as a particularly dangerous idea in economics, since a lot of the time it's actually profitable for economic actors to deliberately exploit the difference between your assumptions and reality.

I believe the argument (massively simplified) goes that if the market were truly irrational someone would be able to reliably beat it and there's not much evidence that that has happened.

Quant bots make the market better by increasing liquidity.

I've always thought that's a sketchy claim. The market would have sufficient liquidity without the bots.

More importantly, they're a huge waste of resources that produces nothing of economic value.

There's no such thing as sufficient liquidity.

Which one claims that all actors in a market have perfect information?

I'm guessing parent's talking about Eugene Fama, who shared the prize with Robert Shiller.

He doesn't actually claim the markets have perfect information, just that the price always reflects all available information. In essence, you can't "beat the market" consistently, assuming you have the same information.

> assuming you have the same information

Which you don't, since Goldman Sachs is always a few milliseconds ahead of everyone else. Given that almost everyone else out there is going to be trading on information that has already been consumed and acted upon by privileged parties, the markets may as well for all intents and purposes be irrational.

There's a lot of fuck up IPOs then. I know I got double my money pretty quick on the VMWare IPO and the Visa IPO, just buying as soon as they went public and selling at a peak after news.

Yes, there are.

If you were able to do that, that means that VMWare and Visa both got screwed out of billions of dollars.

And of course, little guys can't get in right at the IPO price. That's reserved for big players. By systematically underpricing IPOs, the finance folks make billions of dollars for their friends at the expense of the companies they're supposed to represent.

Please provide extraordinary proof for the extraordinary claim that tech IPOs are rigged to transfer shareholder value to the banks managing or participating in the OP.

Virtually every IPO is priced such that the market price is substantially higher than the offer price. This unquestionably transfers money from the market to those who are allowed to buy at the IPO price. That they are designed to do that seems like a reasonable conclusion from the fact that it happens over and over again.

Furthermore, when an IPO is priced such that this does not happen, such as with Facebook, it's criticized and called out as a disaster even though they sold all the stock they wanted to issue and made much more money for their company than they would have otherwise.

That was informative, thanks.

> borderline breach of fiduciary duty.

That's not a real thing.


"breach of fiduciary duty" is a very real thing. (29 USC § 1109 specifically) In this case it has nothing to do with the link you posted. He means the contract that Twitter signed with the banks probably has language that says they will attempt to get the best possible price for the shares. The resulting pop shows that they did not do that.

He means the contract that Twitter signed with the banks probably has language that says they will attempt to get the best possible price for the shares. The resulting pop shows that they did not do that.

Not true. If I'm selling 1 share and see $40, I can probably get $40 for that share. If I'm selling 1M shares it is a lot harder to get $40 for every single one. If I'm selling ~550M shares with zero existing market then getting that $40 is nearly impossible. Twitter worked out a guaranteed ~$26/share which is pretty good. A bird in the hand is better than two in the bush and all that.

No, it doesn't. It would only be a breach of fiduciary duty if the underwriters knew they could price the stock higher, but intentionally decided not to. Something tells me they were expecting a pop, but not quite this significant.

Isn't 29 USC § 1109 about corporate benefit plans? What does that have to do with general Director breaches of fiduciary duty (which is covered under state level business corporate law...)

Wow, it totally is. It's the Employee Retirement Income Security Act. GP are you just pulling stuff out of your ass?

First link that came up on Google, I didn't really dig into it further since I was just refuting that "breach of fiduciary duty" was a made up thing.

Unlike Facebook, none of Twitters employees and VC's are selling, so no internal pressure to grab every last dollar.

There was an employee lockup of Facebook stock, if I remember correctly, so Facebook employees were not selling.

Please correct me if I misunderstood something.

Many Facebook shareholders sold at the IPO. Zuckerberg sold 30M shares and other large investors with huge allocations also sold some. It was calculated, not a free-for-all.

The lockup applies to shares on the open market after IPO. That doesn't preclude someone from participating in the IPO itself.

Got it, thanks for explaining.

Interesting; how is it that employees are able to trade right after the IPO? I thought there was a waiting period for insiders.

not every employee is an insider. Public companies that issue stock to employees can limit the number of people that are made privy to non-public information about the performance of the company, such that some/many employees are allowed to freely trade.

> borderline breach of fiduciary duty.

Fiduciary duty to who? The shareholders that cashed in today are the same ones who are behind the IPO. You're trying to make it seem like some poor distant shareholder got screwed over, which is not true.

There's no guarantee that all the IPO shares would have been placed at $46 (I'd doubt it).

What's the problem with the stock prices remaining high? How is that leaving money on the table? I'm genuinely curious, and have no idea how these things work (if you feel like explaining it like I'm 5 - or directing me to a site that can).


Unless you mean that twitter "sold" shares at $26, but the actual value was closer to $46 - meaning their investors nearly double their money, and twitter raise nearly half of what they could have?

I now little about the stock market, so I'm not sure why you're upset but it sounds important! :) Anyone care to elaborate?

The owners of Twitter prior to the flotation have basically sold a chunk of what they owned on the stock market. To do that they needed to put a value on those shares. Determining that price is pretty tricky but through one mechanism or another they settled on $26 a share.

The fact that people are now willing to buy them for $46 a share suggests that they basically sold them at too low a price (arguably $20 a share too low).

In doing so they've lost out on a fair bit of money. Establishing a value ahead of the flotation is difficult and often companies will err on the side of caution (that is sell slightly cheap) to make the sell off look like a success, but I think it's being suggested that this gap is too big to just be that and that some of the previous owners may be unhappy that they've lost out.

I understand what you mean by "they lost out a fair bit of money". However, that is not exactly true.

They have failed to gain that (admittedly huge) chunk of dollars but they have lost nothing: the have the same money they started with and they never had any more than that. You only lose when you start with X and end up with X-Y, for positive Y.

They have probably missed the opportunity to gain more but that is their mistake (if it is a mistake).

Well, two days ago, they owned n shares of assets that were sellable for $46 a share. Now they have n * 26.

They lost out, just as if I took your $20k new car and gave you $10k, you'd have lost out even though you have more cash.

Did that information exist two days ago? Because if it did not exist, then there was no real $46 value. No REAL market (which is the place where information on value is) implies no monetary value (or a worthless one).

What happens is that they did not guess (and this is an important term, there is no inherent value in a guess) TODAY'S market's expectations correctly. But that has little to do with true monetary loss or gain.

Of course, their expectations today might be crushed. But personal expectations and hopes are not valuable as shares are.

"REAL". I think it's a lot less clear what that means in this context than you apparently do.

That there were explicit people explicitly willing to buy those shares at that price. Exactly that. The explicit term is quite important. Secret information is not part of the market (it is not market information).

Agreed, I should probably have said "there is a feeling they might have missed out on a lot of money".

It's not clear cut but the share price hitting $46 suggests that they could have floated successful at a higher price.

Absolutely true. However, markets are not that easily understood and implicit expectations are quite difficult to assess.

My opinion is that if they had not gone public, nobody would have bought their shares for $46 each. But this is a worthless statement :)

By that logic a random-trading machine that never bought the same security twice would never lose anything, despite reliably winding up with a very worthless portfolio.

No, because you lose value, not shares. So X and Y are measured in $$ not in shares.

Surely the price is only half the equation, and you have to consider the volume too?

Could it not be the case that while they could find buyers for some of the shares at $46, they could only guarantee selling all of the shares at $26?

I agree that Facebook did the best thing, that is raising the most money with the least dilution, though you can see culturally how downward pricing pressure and momentum has forced them to be much more focused on driving revenue than in the past. Revisiting the price in ~3 months will be a much better gauge of the accuracy.

It's not that big a deal. TWTR will do a secondary which will close most of the gap. Popping over 30% is better than 20% or going down. Yes, they were conservative but I think that was prudent here. Maybe they could have gone up a few bucks. I wouldn't sweat it.

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