11/21/2006

Michael Kinsley is a little late to the party...

...with his discovery that the stock market is, in fact inefficient. This op-ed is proof that phrasemongers don't make great economists: In his effort to prove that leveraged buyouts are unfair and thus that a perfect free market is a tenuous abstraction based on ludicrous assumptions, he makes the following rather interesting assumptions: That risk-tolerance is constant for all investors; that nobody is aware that executives running a company may know more about the company that all of the investors; that it is, somehow, a massive failure of the capitalism that millions of people aggregating gigabytes of financial data and extrapolating based on all kinds of assumptions into an infinitely distant future can still peg their estimated value of a company to within a couple percent -- when even getting within an order of magnitude would be a computationally intense task.

Even casting that aside, he ignores what a leveraged buyout really means. Management's pitch is usually something like this: "We know that you could read every single SEC filing and ananlyst report and look at every possible chart and still be not entirely sure that our company will be there tomorrow, much less that it'll be solvent and worth more than it was at the previous day's close. Rather than spend the rest of the time you own our stock feverishly hunting for an information edge, why not let us pay you extra for your stock right now and let you never worry about the company again? We'll worry. We'll not only worry about our competitors, and our friends, and our employees and our regulators and everyone else, but we'll have bankers and private-equity partners breathing down our necks until we can get an incomprehensibly huge debt load paid off. You get cash up front and a chance to relax; we get a lottery ticket and a couple years of hell on earth. Sound fair?" Most of the time, shareholders vote 'Yes'. Most of the time, they make the right choice.

This blog is no longer being updated. Visit ByrneHobart.com for more blogging, or pay a visit to my new Internet stock research and M&A due diligence company.


posted by Byrne Hobart at 2:07:00 AM

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