Buying Opportunity?
May 30, 2010 6:47 AM Subscribe
The stock price of BP is at about $42/share. When the US Market opens after Memorial Day, the price will have surely fallen because of the company's failed "junk shot" and "top kill".
Because it is a multi billion dollar company, and because the world will still need oil, I don't expect it will stop drilling or that the oil it extracts will be any less valuable. But this disaster will probably push its stock price lower than ever in modern memory. So, on Tuesday, is it a buying opportunity?
Because it is a multi billion dollar company, and because the world will still need oil, I don't expect it will stop drilling or that the oil it extracts will be any less valuable. But this disaster will probably push its stock price lower than ever in modern memory. So, on Tuesday, is it a buying opportunity?
OK, a couple of things:
(1) BP's stock trades as an ADR (American Depository Receipt) which is not quite the same thing as a stock. But for the sake of convenience, let's call it a stock.
(2) The lowest price the stock has been in the past 40 years (surely, "modern memory") is less than $1 per share, during the late 1970s.
(3) The stock is a very liquid stock, held in many pension funds, mutual funds, index funds, ETFs, other institutional investors, and so on. Its beta is 0.72, which means it's 18% less volatile than the market overall. This means that large institutional investors don't sell a lot of the stock very frequently, and it bounces around less volatilely that the market overall.
(4) BP's operations are global in scope; whatever cash flow it is losing through its operations in the Gulf Coast are made up elsewhere.
Unless something very surprising happens (say, the British government makes moves to nationalize the oil company, which will never happen) the notion that the stock will drop to its lowest price in modern memory is misguided.
Now, as to the main question: is there a buying opportunity here? Well, perhaps there is, perhaps there isn't. But, in order to answer that question you need to examine your assumptions. Your assumptions are problematic.
posted by dfriedman at 6:56 AM on May 30, 2010 [5 favorites]
(1) BP's stock trades as an ADR (American Depository Receipt) which is not quite the same thing as a stock. But for the sake of convenience, let's call it a stock.
(2) The lowest price the stock has been in the past 40 years (surely, "modern memory") is less than $1 per share, during the late 1970s.
(3) The stock is a very liquid stock, held in many pension funds, mutual funds, index funds, ETFs, other institutional investors, and so on. Its beta is 0.72, which means it's 18% less volatile than the market overall. This means that large institutional investors don't sell a lot of the stock very frequently, and it bounces around less volatilely that the market overall.
(4) BP's operations are global in scope; whatever cash flow it is losing through its operations in the Gulf Coast are made up elsewhere.
Unless something very surprising happens (say, the British government makes moves to nationalize the oil company, which will never happen) the notion that the stock will drop to its lowest price in modern memory is misguided.
Now, as to the main question: is there a buying opportunity here? Well, perhaps there is, perhaps there isn't. But, in order to answer that question you need to examine your assumptions. Your assumptions are problematic.
posted by dfriedman at 6:56 AM on May 30, 2010 [5 favorites]
Correction: its price in the late 1970s was around $3.5. And the late 1970s is closer to 30 years, than 40 years, ago.
posted by dfriedman at 7:01 AM on May 30, 2010
posted by dfriedman at 7:01 AM on May 30, 2010
If you think you have more information about BP's prospects than the rest of the market, go for it. You probably don't, though.
posted by deadweightloss at 7:05 AM on May 30, 2010
posted by deadweightloss at 7:05 AM on May 30, 2010
Well, I already explained why the assumptions are problematic.
But here's some more information. BP has claimed that its costs associated with this leak have been around $1 billion.
In its most recent quarter its revenues from its global operations were around $70 billion. Those revenues dwarf the company's costs, and essentially mean that the company can operate indefinitely, while incurring that $1 billion in costs every month and a half or so.
posted by dfriedman at 7:12 AM on May 30, 2010
But here's some more information. BP has claimed that its costs associated with this leak have been around $1 billion.
In its most recent quarter its revenues from its global operations were around $70 billion. Those revenues dwarf the company's costs, and essentially mean that the company can operate indefinitely, while incurring that $1 billion in costs every month and a half or so.
posted by dfriedman at 7:12 AM on May 30, 2010
If you're thinking it, other investors are, too. The market is efficient and tends to nullify overcorrections.
posted by argybarg at 7:13 AM on May 30, 2010
posted by argybarg at 7:13 AM on May 30, 2010
The OP's main, unstated, problematic assumption is that he's come up with a clever idea that a lot of other people, who have more experience and knowledge in the field, have not come up with.
posted by chengjih at 7:13 AM on May 30, 2010 [2 favorites]
posted by chengjih at 7:13 AM on May 30, 2010 [2 favorites]
My working assumption is that the market price represents all the information avaiable, to anyone with money, on the value of BP. There are legions of fund analysts trying to figure out the likely cost of the spill to BP, versus the value of its holdings, the likely price of oil in 5 years, the likelihood that Iraq stabilizes and starts gushing out oil, etc.
So if you buy a stock speculatively, you are, in essence, guessing that you know better than everybody.
It is always possible that "everybody" is wrong. Everybody was wrong about Enron before the price collapsed. But unless you have inside information (in which case it is illegal to trade on the stock), the odds are that "everybody" knows more than you do.
There have been repeated studies comparing individual analysts against the overall performance of the market. On average, individual analysts perform worse than the market.
So you're welcome to buy BP, but you're essentially gambling.
posted by musofire at 7:15 AM on May 30, 2010
So if you buy a stock speculatively, you are, in essence, guessing that you know better than everybody.
It is always possible that "everybody" is wrong. Everybody was wrong about Enron before the price collapsed. But unless you have inside information (in which case it is illegal to trade on the stock), the odds are that "everybody" knows more than you do.
There have been repeated studies comparing individual analysts against the overall performance of the market. On average, individual analysts perform worse than the market.
So you're welcome to buy BP, but you're essentially gambling.
posted by musofire at 7:15 AM on May 30, 2010
I had the idea to short BP after the leak started. I wish I had, but I didn't have a margin account.
There's a very real political risk in all of this. While the cleanup costs of this may not be all that high, and BP may never have to pay out for all the damage this leak has caused, they may have to pay.
And they the EPA is concidering banning them from reciving any government contracts. Including selling to the military and all leasing rights in federal lands/waters due to their shitty history. Basically BP has been convicted four times of CRIMINAL misconduct relating to their drilling.
OTOH, if you want to give free money to short sellers, feel free to buy.
posted by delmoi at 7:37 AM on May 30, 2010
There's a very real political risk in all of this. While the cleanup costs of this may not be all that high, and BP may never have to pay out for all the damage this leak has caused, they may have to pay.
And they the EPA is concidering banning them from reciving any government contracts. Including selling to the military and all leasing rights in federal lands/waters due to their shitty history. Basically BP has been convicted four times of CRIMINAL misconduct relating to their drilling.
Over the past 10 years, BP has paid tens of millions of dollars in fines and been implicated in four separate instances of criminal misconduct that could have prompted this far more serious action. Until now, the company's executives and their lawyers have fended off such a penalty by promising that BP would change its ways.The government has every reason to bar them, and if that happens the stock will certainly get hammered pretty hard. That would mean no more drilling offshore anywhere near the U.S.
That strategy may no longer work.
Days ago, in an unannounced move, the EPA suspended negotiations with the
petroleum giant over whether it would be barred from federal contracts because of the environmental crimes it committed before the spill in the Gulf of Mexico. Officials said they are putting the talks on hold until they learn more about the British company's responsibility for the plume of oil that is spreading across the Gulf.
Even a temporary expulsion from the U.S. could be devastating for BP's business. BP is the largest oil and gas producer in the Gulf of Mexico and operates some 22,000 oil and gas wells across United States, many of them on federal lands or waters. According to the company, those wells produce 39 percent of the company's global revenue from oil and gas production each year -- $16 billion.I think the $1 billion figure is incredibly optimistic, their total costs could be far more, and that completely ignores the 1) the liability for lost revenue along the gulf coast, and 2) political costs caused by being disbarred from government contracts.
OTOH, if you want to give free money to short sellers, feel free to buy.
posted by delmoi at 7:37 AM on May 30, 2010
Personally I wouldn't want to profit from BP's operations. Yeah, it sounds all goody-goody, ethical and preachy -- but when you think of the number of people who are going to be inadequately compensated, who lives are going to be turned upside down, who are going to suffer this summer, and probably for years to come ... it really takes the fun and pleasure out of making money off such speculation.
In this current market there's loads and loads of decently priced stocks in the oilfield sector which has been hammered recently. Pick another one and run with it.
If you're still interested in investing in BP after reading this, I'd say the stock still has some way to go before it resumes some form of an upward trend.
posted by the_ancient_mariner at 7:55 AM on May 30, 2010
In this current market there's loads and loads of decently priced stocks in the oilfield sector which has been hammered recently. Pick another one and run with it.
If you're still interested in investing in BP after reading this, I'd say the stock still has some way to go before it resumes some form of an upward trend.
posted by the_ancient_mariner at 7:55 AM on May 30, 2010
If you think you have more information about BP's prospects than the rest of the market, go for it. You probably don't, though.
If you're thinking it, other investors are, too. The market is efficient and tends to nullify overcorrections.
The OP's main, unstated, problematic assumption is that he's come up with a clever idea that a lot of other people, who have more experience and knowledge in the field, have not come up with.
So if you buy a stock speculatively, you are, in essence, guessing that you know better than everybody.
That reminds me of a joke: Two economists are walking down the street when one steps on a $100 bill on the floor. The other says "Are you going to pick up that $100 on the floor?" and the first one replies "If there was $100 on the floor, someone else would have picked it up already".
Seriously, though, any stock market investment is a gamble where you may lose all the money you invest, and things could get worse for BP yet and mightn't get better for a long time.
Some other oil companies' stocks have fallen recently, due to the expectation that they're soon going to be more heavily regulated (e.g. compulsory relief wells); you could invest in those companies instead.
posted by Mike1024 at 7:59 AM on May 30, 2010
If you're thinking it, other investors are, too. The market is efficient and tends to nullify overcorrections.
The OP's main, unstated, problematic assumption is that he's come up with a clever idea that a lot of other people, who have more experience and knowledge in the field, have not come up with.
So if you buy a stock speculatively, you are, in essence, guessing that you know better than everybody.
That reminds me of a joke: Two economists are walking down the street when one steps on a $100 bill on the floor. The other says "Are you going to pick up that $100 on the floor?" and the first one replies "If there was $100 on the floor, someone else would have picked it up already".
Seriously, though, any stock market investment is a gamble where you may lose all the money you invest, and things could get worse for BP yet and mightn't get better for a long time.
Some other oil companies' stocks have fallen recently, due to the expectation that they're soon going to be more heavily regulated (e.g. compulsory relief wells); you could invest in those companies instead.
posted by Mike1024 at 7:59 AM on May 30, 2010
The OP's main, unstated, problematic assumption is that he's come up with a clever idea that a lot of other people, who have more experience and knowledge in the field, have not come up with.
And your point is? You have to start somewhere, might as well be here. This kind of attitude is really discouraging, pointless and negative. It's his money, let him play with it, make some mistakes and learn.
posted by the_ancient_mariner at 8:00 AM on May 30, 2010 [1 favorite]
And your point is? You have to start somewhere, might as well be here. This kind of attitude is really discouraging, pointless and negative. It's his money, let him play with it, make some mistakes and learn.
posted by the_ancient_mariner at 8:00 AM on May 30, 2010 [1 favorite]
My working assumption is that the market price represents all the information avaiable, to anyone with money, on the value of BP.
That's a really poor working assumption. As anyone who's lived and invested or traded through the last two years could tell you (and further back through any number of bubbles), price has had a pretty good tendency of getting off-track from "the information available", mostly due to behavioural factors of the people who are pricing things. It's still amazing to me that people go back to various forms of the efficient markets theory in these threads.
posted by Big Fat Tycoon at 8:07 AM on May 30, 2010
That's a really poor working assumption. As anyone who's lived and invested or traded through the last two years could tell you (and further back through any number of bubbles), price has had a pretty good tendency of getting off-track from "the information available", mostly due to behavioural factors of the people who are pricing things. It's still amazing to me that people go back to various forms of the efficient markets theory in these threads.
posted by Big Fat Tycoon at 8:07 AM on May 30, 2010
On Tuesday morning London will open many hours ahead of New York, the main Asian markets don't take Monday off, and it's not as if the futures and options traders aren't already working their little designer socks off over this. I'm not an efficient-markets person, but much of the weekend's activities are going to be priced into the markets when the bell rings.
It's your money to play with.
posted by holgate at 8:15 AM on May 30, 2010
It's your money to play with.
posted by holgate at 8:15 AM on May 30, 2010
The efficient market hypothesis is total B.S, btw. Anyone who watches the stock market can see stocks going up and down for no reason at all. It's obvious that the market isn't rational at all. Maybe over the long term, but over a period of days, months? No way.
posted by delmoi at 8:18 AM on May 30, 2010
posted by delmoi at 8:18 AM on May 30, 2010
The OP's main, unstated, problematic assumption is that he's come up with a clever idea that a lot of other people, who have more experience and knowledge in the field, have not come up with.
The many responders echoing this sentiment are essentially re-stating the Efficient Market Hypothesis, and taking it as fact. That is a "problematic assumption" in itself, as there plenty are plenty of well-reasoned refutations of the EMH. Empirical evidence refutes the "strong" EMH outright, and is at-best inconclusive on the "weak" EMH. Indeed, the entire field of Behavioral Economics has grown very healthily, and is entirely counter to the EMH.
posted by randomstriker at 8:30 AM on May 30, 2010 [2 favorites]
The many responders echoing this sentiment are essentially re-stating the Efficient Market Hypothesis, and taking it as fact. That is a "problematic assumption" in itself, as there plenty are plenty of well-reasoned refutations of the EMH. Empirical evidence refutes the "strong" EMH outright, and is at-best inconclusive on the "weak" EMH. Indeed, the entire field of Behavioral Economics has grown very healthily, and is entirely counter to the EMH.
posted by randomstriker at 8:30 AM on May 30, 2010 [2 favorites]
There is no evidence an individual investor picking and choosing individual stocks based on what he perceives to be market "mispricing" can beat the return of an index fund.
posted by deadweightloss at 8:39 AM on May 30, 2010
posted by deadweightloss at 8:39 AM on May 30, 2010
There is no evidence an individual investor picking and choosing individual stocks based on what he perceives to be market "mispricing" can beat the return of an index fund.That's completely different from the efficient market hypothesis. In any event, if individuals picking stocks can't outperform the market, then why do banks hire people and pay them millions to do just that? it seems really unlikely that these people can't out perform the market, or a random agent.
Also, from what I understand the median investor can't make beat the market, but some investors (the top percentiles) can.
posted by delmoi at 9:07 AM on May 30, 2010
The efficient market hypothesis is total B.S, btw. Anyone who watches the stock market can see stocks going up and down for no reason at all. It's obvious that the market isn't rational at all.
The fact that stocks waver and wander doesn't contradict the efficient market hypothesis. Neither does the fact that investors sometimes chase each other in sell-offs or buying sprees. One misreading of the hypothesis is that the market, in aggregate, behaves as a human-style rational actor, making reasonable "decisions" that accurately model information. This is no one's hypothesis (well, financial reporters act this way sometimes, but they're just writing stories). "Rational" has a different meaning in economics than in common parlance.
The efficient market hypothesis says that your notion about a stock, the one you think is invisible to the rest of the investors, is already part of the dynamic of the stock price. There are no secrets. This doesn't apply to true insider information, but it very much applies to things like CollectiveMind's hope that no one else has considered that BP might be undervalued.
I agree that the efficient market hypothesis is debatable in theoretical terms. Stock prices reflect not just information but information about information, suspicions about theories about events (like sell-offs) around suspicions about theories. But ultimately these are all just information, as much as the results of a lawsuit or a clinical trial.
The point is that investors, as opposed to theorists, would do best to take the efficient market hypothesis seriously. As I said above, if you thought of something about a stock, you should assume that others have too.
posted by argybarg at 9:12 AM on May 30, 2010
The fact that stocks waver and wander doesn't contradict the efficient market hypothesis. Neither does the fact that investors sometimes chase each other in sell-offs or buying sprees. One misreading of the hypothesis is that the market, in aggregate, behaves as a human-style rational actor, making reasonable "decisions" that accurately model information. This is no one's hypothesis (well, financial reporters act this way sometimes, but they're just writing stories). "Rational" has a different meaning in economics than in common parlance.
The efficient market hypothesis says that your notion about a stock, the one you think is invisible to the rest of the investors, is already part of the dynamic of the stock price. There are no secrets. This doesn't apply to true insider information, but it very much applies to things like CollectiveMind's hope that no one else has considered that BP might be undervalued.
I agree that the efficient market hypothesis is debatable in theoretical terms. Stock prices reflect not just information but information about information, suspicions about theories about events (like sell-offs) around suspicions about theories. But ultimately these are all just information, as much as the results of a lawsuit or a clinical trial.
The point is that investors, as opposed to theorists, would do best to take the efficient market hypothesis seriously. As I said above, if you thought of something about a stock, you should assume that others have too.
posted by argybarg at 9:12 AM on May 30, 2010
As I said above, if you thought of something about a stock, you should assume that others have too.
That's well and good, but EMH posits that this information is immediately baked into whatever price prevails, and that an individual investor can never hope be more efficient at pricing than the overall market itself. There are tons of real world, frictional factors at play that mean that "visible information" isn't actually "already part of the dynamic of the stock price." It's this kind of philosophical, "you can't beat the market so don't bother trying" theory that gets bandied about by people who haven't actually done particularly well in their investing.
posted by Big Fat Tycoon at 10:06 AM on May 30, 2010
That's well and good, but EMH posits that this information is immediately baked into whatever price prevails, and that an individual investor can never hope be more efficient at pricing than the overall market itself. There are tons of real world, frictional factors at play that mean that "visible information" isn't actually "already part of the dynamic of the stock price." It's this kind of philosophical, "you can't beat the market so don't bother trying" theory that gets bandied about by people who haven't actually done particularly well in their investing.
posted by Big Fat Tycoon at 10:06 AM on May 30, 2010
Inasmuch as the stock market may seem sort of like betting on the horses, in which you take a little knowledge and translate it into a gamble with a potentially big payout, it might help to remember that buying stock is traditionally considered an "investment." And that buying said company's stock could be construed not as trying to game the system, but rather as supporting BP.
So I think a relevant question for you, CollectiveMind, would be this: Do you support BP?
posted by limeonaire at 10:27 AM on May 30, 2010
So I think a relevant question for you, CollectiveMind, would be this: Do you support BP?
posted by limeonaire at 10:27 AM on May 30, 2010
The information is baked into the price, along with everything else. It's a constant mess in constant motion. I suspect that the chaos, and not the calm assimilation of information, is what keeps investors from regularly outperforming the rest of the market.
And are there investors who consistently outperform the market? Demonstrably outside of chance? I'm skeptical.
posted by argybarg at 10:42 AM on May 30, 2010
And are there investors who consistently outperform the market? Demonstrably outside of chance? I'm skeptical.
posted by argybarg at 10:42 AM on May 30, 2010
The fact that stocks waver and wander doesn't contradict the efficient market hypothesis.
Actually, it does. The whole idea behind the EMH is that stocks are priced exactly where they should be given all the information available. But, if stocks go up and down for no reason, then that's obviously not the case.
And are there investors who consistently outperform the market? Demonstrably outside of chance? I'm skeptical.
Warren Buffet? Seems pretty common, after all as I said banks hire people to do this all the time. Why would they if it wasn't possible?
posted by delmoi at 10:47 AM on May 30, 2010
Actually, it does. The whole idea behind the EMH is that stocks are priced exactly where they should be given all the information available. But, if stocks go up and down for no reason, then that's obviously not the case.
And are there investors who consistently outperform the market? Demonstrably outside of chance? I'm skeptical.
Warren Buffet? Seems pretty common, after all as I said banks hire people to do this all the time. Why would they if it wasn't possible?
posted by delmoi at 10:47 AM on May 30, 2010
As I said above, if you thought of something about a stock, you should assume that others have too.
In other words, unless you have a completely original idea, don't bother executing it. This contradicts everything we know about how the world functions: ideas are a dime a dozen, it's in execution that winners and losers are made.
The fact is that the BP crisis *does* provide an opportunity for profit via arbitrage. Any situation where there is volatility is ripe for arbitrage. You "just" need to do lots of research, have developed good skill and judgment and have some luck on your side. Buy/sell the right amounts at the right prices at the right time, using the appropriate amount of leverage.
posted by randomstriker at 11:01 AM on May 30, 2010 [1 favorite]
In other words, unless you have a completely original idea, don't bother executing it. This contradicts everything we know about how the world functions: ideas are a dime a dozen, it's in execution that winners and losers are made.
The fact is that the BP crisis *does* provide an opportunity for profit via arbitrage. Any situation where there is volatility is ripe for arbitrage. You "just" need to do lots of research, have developed good skill and judgment and have some luck on your side. Buy/sell the right amounts at the right prices at the right time, using the appropriate amount of leverage.
posted by randomstriker at 11:01 AM on May 30, 2010 [1 favorite]
In my opinion, there are three scenarios with BP: they go bankrupt, they get bought out really cheaply, they survive. If they survive, they will be almost certainty be worth north of 50 at some point in the future. Plus they will end up paying dividends, which if you bought at 42, are around 8%. (Dividends probably will get cut, but still, great potential for dividends). If you believe they arn't going bankrupt and have a very long time horizon, it may be safe to buy at 42-43 (which is exactly what I did). Having said that, this plan is risky. If it was just BP you had to worry about, I'd be very gungho about the idea. But you have political risk here. And that is far more dangerous then any other type of risk. Tread carefully. If you want lower risk ideas, note that all of the oil companies and oil service companies got sold here, even if they had minimal or low risk. Shell has a 6.4% dividend yield. There are much safer bargains lurking around then BP. This should not be taken as advice on what you should do.
For whatever it is worth, I would ignore the EMH people here, because the EMH itself leads to contradictions over the long term. (EMH -> indexing, but if everyone assumes that you can't get better then indexed returns, then you can get better then indexed returns).
Disclosure: Long BP, RIG, Shell, random oil companies
posted by An algorithmic dog at 12:01 PM on May 30, 2010 [1 favorite]
For whatever it is worth, I would ignore the EMH people here, because the EMH itself leads to contradictions over the long term. (EMH -> indexing, but if everyone assumes that you can't get better then indexed returns, then you can get better then indexed returns).
Disclosure: Long BP, RIG, Shell, random oil companies
posted by An algorithmic dog at 12:01 PM on May 30, 2010 [1 favorite]
The efficient market hypothesis is largely irrelevant in this case. To predict a movement of a stock, predict the movements of the people buying and selling it. Right now there is not another stock that has so much speculation around it as BP. This means that a lot of people, informed, uninformed, lucky and unlucky are going to have a feeding frenzy. With so many people watching there is no way it's a sure bet or easy money (which I think is the question).
The real question back to CollectiveMind is: Do you have what it takes (nerves, money) to survive a feeding frenzy in the stock market?
posted by Ookseer at 12:10 PM on May 30, 2010
The real question back to CollectiveMind is: Do you have what it takes (nerves, money) to survive a feeding frenzy in the stock market?
posted by Ookseer at 12:10 PM on May 30, 2010
The fact is that the BP crisis *does* provide an opportunity for profit via arbitrage. Any situation where there is volatility is ripe for arbitrage. You "just" need to do lots of research, have developed good skill and judgment and have some luck on your side.
I don't think "having luck on your side" counts as arbitrage, nor do I see the connection between volatility and arbitrage.
Warren Buffet? Seems pretty common, after all as I said banks hire people to do this all the time. Why would they if it wasn't possible?
As far as I'm aware, Buffet buys controlling interests in companies, reorganizes them to his liking, and, in most cases, turns them profitable, thus greatly increasing the value of his stock. If you have the business acumen and the capital, this is a great way to make money. I believe Buffet's current investment advice is to buy index funds.
If the market is so inefficient that someone can read up on a company and invest profitably, then there would be some algorithm (i.e. only buy stocks that have recently declined, only buy stocks with low P/E ratio, whatever) that could beat the return to index funds. Accounting for the transactions costs of stock purchases, I am aware of no such algorithm (and, as a research economist, have more than a passing interest in this).
Go ahead and buy BP if you want; just don't doubt that you're purchasing a probability distribution. BP's probably has a higher-than-normal risk, as well as a higher-than-normal expected return.
posted by deadweightloss at 12:21 PM on May 30, 2010 [1 favorite]
I don't think "having luck on your side" counts as arbitrage, nor do I see the connection between volatility and arbitrage.
Warren Buffet? Seems pretty common, after all as I said banks hire people to do this all the time. Why would they if it wasn't possible?
As far as I'm aware, Buffet buys controlling interests in companies, reorganizes them to his liking, and, in most cases, turns them profitable, thus greatly increasing the value of his stock. If you have the business acumen and the capital, this is a great way to make money. I believe Buffet's current investment advice is to buy index funds.
If the market is so inefficient that someone can read up on a company and invest profitably, then there would be some algorithm (i.e. only buy stocks that have recently declined, only buy stocks with low P/E ratio, whatever) that could beat the return to index funds. Accounting for the transactions costs of stock purchases, I am aware of no such algorithm (and, as a research economist, have more than a passing interest in this).
Go ahead and buy BP if you want; just don't doubt that you're purchasing a probability distribution. BP's probably has a higher-than-normal risk, as well as a higher-than-normal expected return.
posted by deadweightloss at 12:21 PM on May 30, 2010 [1 favorite]
Seems pretty common, after all as I said banks hire people to do this all the time. Why would they if it wasn't possible?
There have been plenty of studies showing randomly-selected portfolios matching or outperforming those chosen by very well-paid analysts. Banks and money markets hire them because they can't tell investors they choose their funds by chickens pecking at grain. And who knows? They may believe in their analysts as well. But I don't.
And I do think this is an example of the efficient market hypothesis in action. People are, in my opinion, misreading the hypothesis here. They expect that one should be able to cleanly read a finite number of rational calculations at work, and see their effect clearly reflected in the stock price. But all the hypothesis says is that the publicly available information is there in the stock price. The amount of information may be enormous and contradictory, but it is there.
The alternative to the efficient market hypothesis is to say something like: The mass of investors thinks A, but has not considered B. Therefore, the price of the stock does not include a judgement on B. Because I have considered B, I have an edge on the rest of the market. I find that this alternative ascribes more human-style intelligence than the efficient-market hypothesis does. It suggests that markets think something, can hold an opinion, and can be wrong.
But it seems it is more fruitful and realistic to assume that the price reflects the aggregate of relevant hypotheses, including those based on others' relevant hypotheses on others' relevant hypotheses. The market cannot be wrong, because it largely creates its own outcomes.
It's a system based on feedback loops (e.g., views on other investors' views) so it is going to proceed chaotically. But that is not because the stock price inaccurately reflects the information in the system, but because the information is itself a chaotic system.
Whether that makes the EMH inaccurate, irrelevant or tautological is up to you. But it does suggest that attempts to be smarter than the system are likely to be foiled — because those attempts are part of the system, too.
posted by argybarg at 12:30 PM on May 30, 2010
There have been plenty of studies showing randomly-selected portfolios matching or outperforming those chosen by very well-paid analysts. Banks and money markets hire them because they can't tell investors they choose their funds by chickens pecking at grain. And who knows? They may believe in their analysts as well. But I don't.
And I do think this is an example of the efficient market hypothesis in action. People are, in my opinion, misreading the hypothesis here. They expect that one should be able to cleanly read a finite number of rational calculations at work, and see their effect clearly reflected in the stock price. But all the hypothesis says is that the publicly available information is there in the stock price. The amount of information may be enormous and contradictory, but it is there.
The alternative to the efficient market hypothesis is to say something like: The mass of investors thinks A, but has not considered B. Therefore, the price of the stock does not include a judgement on B. Because I have considered B, I have an edge on the rest of the market. I find that this alternative ascribes more human-style intelligence than the efficient-market hypothesis does. It suggests that markets think something, can hold an opinion, and can be wrong.
But it seems it is more fruitful and realistic to assume that the price reflects the aggregate of relevant hypotheses, including those based on others' relevant hypotheses on others' relevant hypotheses. The market cannot be wrong, because it largely creates its own outcomes.
It's a system based on feedback loops (e.g., views on other investors' views) so it is going to proceed chaotically. But that is not because the stock price inaccurately reflects the information in the system, but because the information is itself a chaotic system.
Whether that makes the EMH inaccurate, irrelevant or tautological is up to you. But it does suggest that attempts to be smarter than the system are likely to be foiled — because those attempts are part of the system, too.
posted by argybarg at 12:30 PM on May 30, 2010
It is ironic that people in this thread cite Warren Buffett as the counter example for the efficient market hypothesis given that he suffered one of his worst losses ever by investing in the oil company Conoco Phillips.
posted by JackFlash at 1:24 PM on May 30, 2010
posted by JackFlash at 1:24 PM on May 30, 2010
If you ever needed proof that Metafilter isn't the right place for investment advice, consider the fact that people are considering that BP could go bankrupt over this. Not a chance, never, ever ever. The absolute worse case scenario would likely be a merger of some sort with another company.
posted by speedgraphic at 2:07 PM on May 30, 2010
posted by speedgraphic at 2:07 PM on May 30, 2010
The fact is that the BP crisis *does* provide an opportunity for profit via arbitrage
This isn't an opportunity for profit through arbitrage. Arbitrage is taking advantage of a mismatch in pricing between two fungible things, buying the cheaper and selling the more expensive so as to profit from the differential. That's not what's happening in this case; there isn't a mismatch between markets, but just a bet on the viability of BP.
posted by Big Fat Tycoon at 4:08 PM on May 30, 2010
This isn't an opportunity for profit through arbitrage. Arbitrage is taking advantage of a mismatch in pricing between two fungible things, buying the cheaper and selling the more expensive so as to profit from the differential. That's not what's happening in this case; there isn't a mismatch between markets, but just a bet on the viability of BP.
posted by Big Fat Tycoon at 4:08 PM on May 30, 2010
There is absolutely no reason to believe that chaotic system implies that attempts to be smarter than the system are likely to be foiled. For instance, with BP, how many fund managers are going to sell it (or RIG) just so they don't have to answer why they hold BP? BP right now suffers from the same problem as sub $5 stocks often suffer from. It is impossible for institutional investors to practically hold the stock with adverse propaganda filling the airwaves. (Yes this is a disaster. On the other hand all of the speculation that BP isn't doing everything they can to seal the well, which is quite popular in main stream media, is nothing but anti-BP slamming).
FWIW: I agree with speedgraphic that BP is not going bankrupt over this. On the other hand, the worst case of a merger could easily be at a serious discount to $43. (For one, BP is a British company and it would be pretty hard to force them into bankruptcy based on US fines or lawsuits even if they somehow racked up that much in liabilities. )
As far as I'm aware, Buffet buys controlling interests in companies, reorganizes them to his liking, and, in most cases, turns them profitable, thus greatly increasing the value of his stock
This isn't what Buffet does at all. Some of his most successful trades before he was rich were things like putting 60-70% of his fund in AMEX when everyone thought it was going bankrupt. When people realized they were being stupid and AMEX's price corrected, he sold. The getting heavily involved in companies is largely a new thing that started after he was already rich. I recommend you read his biography. When it comes to Warren Buffet, do as he does, not as he says. The way he got rich has nothing to do with the investment philosophy he says people should use. He essentially ran an unlevered long only hedge fund.
posted by An algorithmic dog at 8:43 PM on May 30, 2010 [2 favorites]
FWIW: I agree with speedgraphic that BP is not going bankrupt over this. On the other hand, the worst case of a merger could easily be at a serious discount to $43. (For one, BP is a British company and it would be pretty hard to force them into bankruptcy based on US fines or lawsuits even if they somehow racked up that much in liabilities. )
As far as I'm aware, Buffet buys controlling interests in companies, reorganizes them to his liking, and, in most cases, turns them profitable, thus greatly increasing the value of his stock
This isn't what Buffet does at all. Some of his most successful trades before he was rich were things like putting 60-70% of his fund in AMEX when everyone thought it was going bankrupt. When people realized they were being stupid and AMEX's price corrected, he sold. The getting heavily involved in companies is largely a new thing that started after he was already rich. I recommend you read his biography. When it comes to Warren Buffet, do as he does, not as he says. The way he got rich has nothing to do with the investment philosophy he says people should use. He essentially ran an unlevered long only hedge fund.
posted by An algorithmic dog at 8:43 PM on May 30, 2010 [2 favorites]
The alternative to the efficient market hypothesis is to say something like: The mass of investors thinks A, but has not considered B. Therefore, the price of the stock does not include a judgement on B. Because I have considered B, I have an edge on the rest of the market.
It isn't so much that they would have not considered B, but that they haven't realized it due to some kind of pathology or groupthink. A good example would be the people betting against the housing market in '08.
And yeah the EMH is contradictory. If everyone believed the EMH, they would never invest when things seemed lower then they should be, and thus stocks that were lower then they should be would actually be worth buying.
EMH basically relies on an infinite number of investors. Since there are a finite number, it actually is possible that no one had thought about B.
It's fairly obvious that various stock prices are wrong, it's just not obvious whether they're too high or too low.
posted by delmoi at 2:00 AM on May 31, 2010
It isn't so much that they would have not considered B, but that they haven't realized it due to some kind of pathology or groupthink. A good example would be the people betting against the housing market in '08.
And yeah the EMH is contradictory. If everyone believed the EMH, they would never invest when things seemed lower then they should be, and thus stocks that were lower then they should be would actually be worth buying.
EMH basically relies on an infinite number of investors. Since there are a finite number, it actually is possible that no one had thought about B.
It's fairly obvious that various stock prices are wrong, it's just not obvious whether they're too high or too low.
posted by delmoi at 2:00 AM on May 31, 2010
BP tanked 13% today. Did you end up buying?
Heh, I looked for this thread just to see if there was any followup today.
posted by dfan at 11:52 AM on June 9, 2010
Heh, I looked for this thread just to see if there was any followup today.
posted by dfan at 11:52 AM on June 9, 2010
Actually that followup was from the 1st. The last time BP tanked double digits. :) Today it actually tanked 15.8% Overall, it's down 32% since this post was posted. There's a lot of talk about potentially a bankruptcy, whether or not other oil companies can pick up their equipment on the cheap. People are talking seriously about the potential for bankruptcy. A big part of that is that if there are found to be criminal violations, the liability cap goes away.
I think it's fairly obvious at this point that Scott Adams gives terrible investment advice.
posted by delmoi at 8:49 PM on June 9, 2010
I think it's fairly obvious at this point that Scott Adams gives terrible investment advice.
posted by delmoi at 8:49 PM on June 9, 2010
This thread is closed to new comments.
Well, considering there is still oil spewing, another hair-brained scheme in the works and a lot of pressure on congress to get legislation through to increase their liability to much higher levels...I wouldn't be quick to buy their stock.
posted by Hiker at 6:50 AM on May 30, 2010