Sunday, November 8, 2015

Desperate investors have to put their money somewhere

From In Profits We Trust by Megan McArdle.

People who don't actively trade markets (e.g., academics, journalists, most lay people) are constantly inventing theories attempting to explain bubbles and other unusual price behaviors.

The simple truth is that economies are not physical systems. They represent the simultaneous collective wisdom – or lack thereof – of millions of individual human beings. So they are often neither rational nor random. But this does not mean that some other method of allocating scarce resources (e.g., centralized planning) could ever produce a superior outcome.

McArdle is talking about the spectacular number of unprofitable start-ups there are out there.
Ten years ago, companies that were losing money hand over fist managed massive IPOs, vaporizing billions of investor dollars on nerfball courts and websites that gave stuff away for free. Then the bubble crashed. We got wiser. Investors started asking for proof that you were at least close to turning a profit.

That was then. This is now, according to a Wall Street Journal report that cited an assessment by Jay Ritter, a finance professor at the University of Florida. The article says that two-thirds of U.S.-listed tech debuts in 2013 lost money:
Here is the observation which I believe remains true today.
One of the explanations for the financial crisis, which I find convincing at least as a contributing factor, is what Federal Reserve Chairman Ben Bernanke called the "Global Savings Glut." Too much money was chasing high-return assets, and when that money couldn't find actual high-return assets, it created them by blowing bubbles.

For the past 15 years, we have blown bubble after bubble, as excess savings chased too few investment opportunities. As the global population ages, this is probably going to get worse, not better. Individuals and pension managers are going to be desperately looking for financial assets that will let them retire for decades even as the ratio of workers to retirees shrinks.

Many of the recent high-flying IPOs have been disasters for their investors, notably Zynga and Groupon, whose business models seemed to collapse not long after they got investors to buy in. But I'm not sure how much that matters. Desperate investors have to put their money somewhere, even if they can't find anywhere good.

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