In investing, it’s all about expectations. What matters is not the brilliance of a company’s business model or the competence of its management — it’s about how your expectations of its future prospects stack up against those of the market as a whole.
Sports fandom is a little bit like that. This realization originally came to me when I attended my first Alabama football game, in 1989. (Thanks for the ticket, Dr. Leitner!) I’d grown up going to Cal football games, where the baseline expectation was defeat and even glorious victories contained their share of interceptions and ridiculous penalties. My first game in Tuscaloosa was against some lesser opponent or other (Ole Miss, perhaps?), and the sour, sure-hope-the-Tide-don’t-screw-up mood in the stadium shocked me. Hardly anybody, except the drunk students, seemed to be having any fun.
So anyway, game three of the American League Championship Series is about to start, with my Athletics down 2-0. The special A’s martini at right (with olives and a twist) was made to celebrate the glorious three-game victory over the Twins in the division. Now things aren’t looking so good, but the tone on Athletics Nation remains mostly positive. In fact, most of the fans posting there seem to relish the fact that their team has dug itself into underdog status. If they come back, it’ll show those no-good Yankee fans on ESPN and Fox! And if they don’t, well, they will have still done pretty well for a team nobody gave much of a shot to even get past the Twins.
The A’s, then, are a value stock. Or maybe they’re a GARP (growth at a reasonable price) stock. After all, it’s not much fun to support a team that’s never been anything but bad–the Devil Rays, for example. But neither does it seem to be a lot of fun to be a Yankees or Chelsea fan these days. It might be okay if you acquired your fandom during some long-forgotten streak of losing seasons. But that’s not when most people adopt teams. Which is true in investing as well.
UPDATE: After all that brave talk, it was still pretty unpleasant to watch them lose 3-0 tonight. I even switched over to Daisy Cooks! for a couple of innings.
I’ve been meaning for a while to write a tongue-in-cheek post about how the real reason Joe Lieberman lost to Ned Lamont was his wrong-headed stance on stock-option expensing in the 1990s.
When the Connecticut-based Financial Accounting Standards Board proposed in the early 1990s that options grants be counted as a cost and subtracted from earnings, Lieberman led the successful charge in Washington to bully FASB into backing down. Among his most vocal partners in accounting crime was California’s Barbara Boxer, although I’m a little bit more sympathetic to her stance because it was pretty much impossible to find anyone in her (Northern) part of the state in the 1990s who wasn’t brainwashed into thinking that options had magical economic powers and expensing would kill the magic. Only after the corporate scandals of the early ’00s was FASB finally able to push through with options expensing (and even then Congress might have thwarted it if not for the resolute stance of, of all people, Alabama Republican Richard Shelby, chairman of the Senate Finance Committee).
It turns out, though, that I’d been beaten to the punch. Jack Ciesielski today alerted readers of his often-entertaining accounting blog to an Aug. 9 post by economist Dean Baker on the topic.
There may not have been a single person in the state of Connecticut who voted against Senator Lieberman yesterday because of his harassment of FASB. Other issues loomed larger. But those who think that honest accounting is essential to the working of the economy might believe that some justice was done in this election.
It turns out Baker wasn’t even the first to bring this up. On Aug. 6, a Daily Kos poster named Treebeard offered a detailed account of Lieberman’s role in the options travesty. So maybe the issue did swing a few votes (although I guess any Connecticutter reading Kos was already voting Lamont). In any case, watch out, Barbara Boxer. The accounting purists may be coming to get you.
Citigroup is being charged with insider trading in Australia for feverishly buying shares in Patrick Corp. (which loads and unloads ships) the day before Toll Holdings (which moves stuff around on trucks, trains, and ships) announced an unfriendly takeover bid for Patrick. Citi’s investment bankers were advising Toll in its raid, so Australian regulators allege that its proprietary traders must have partaken of inside information.
I’m more or less willing to believe Citi’s defense, as elucidated in the Financial Times, which is that rumors about the bid were already flying around Sydney, so it would have been even more suspicious if Citi had stopped trading Patrick shares. A “Chinese wall” separates Citi’s traders and investment bankers, so the traders must have heard the rumors elsewhere.
But the Australian regulators, who apparently want to make it illegal for investment banks to trade in the shares of companies that they’re advising, have highlighted something highly iffy about how these firms now make their money. As Citi put it in a statement quoted in the AP story about the case (but different from the one I found on the bank’s Australia website), the charges are “an attempt to regulate the proprietary trading desks which are a feature of all major investment banks.”
Proprietary trading is actually not just a feature but the most profitable one for most investment banks these days. And there’s really no way to explain this sustained profitability other than that traders at the big investment banks have access to information that those on the other side of the trades don’t. If the banks’ compliance people are any good, none of this is technically insider trading: Traders at Goldman or Merrill aren’t getting directly tipped off by the M&A dealmakers at their firms. But the traders are taking every other possible advantage of their position at the center of lots of different deals for lots of different customers.
I’ve explored this in a couple of different Fortune articles, but I don’t think I’m anywhere close to really understanding what really goes on. It strikes me as a clear conflict of interest to make a big trade for a client while at the same time squeezing bits of extra profit out of proprietary trading because the traders know something that the client doesn’t. But it’s a conflict of interest that is (a) not illegal and (b) helps ensure that there are highly paid people and well-funded institutions around to keep securities trading smoothly. Somehow I think Goldman, Morgan Stanley, Merrill, Citigroup, et. al. are getting the sweeter end of this deal (and driving up the price of Manhattan real estate in the process). But I’m not at all convinced that there’s a better way.