Tag Archives: share buybacks

Game Theory, Behavioral Finance, and Investing: Part 2 of 5

In Part 1 of this series, I set the stage for a discussion of behavioral finance and game theory as they pertain to how market participants behave.  In Part 2, I expand upon some of ways that individuals and institutions behave in ways that can be explored from this perspective.

Giving People What They Want

One of the most striking features of the capital markets of the recent year or two has been the ‘Las Vegas’ feeling to much of the action in the markets.  There has been tremendous excitement around IPOs of companies including Zynga (ZNGA), Groupon (GRPN), and most notably Facebook (FB).  The hoopla around the Facebook IPO, in particular, is without precedent.  Why do the financial media and corporate management work together to create this frenzy?  The answer is simple: people buy it.  If investors ignored the carnival atmosphere around these firms, we wouldn’t see this kind of media.  If people say that they want to invest in solid well-run profitable firms, but clearly signal that what they are actually buying is shares in IPOs of companies with enormous dreams but untested business models, we know what Wall Street will provide.  If investors seem to be seeking investments that behave like lottery tickets, it is perfectly rational for venture capitalists to fund such companies and to rapidly take them public.  I view the marketing of Facebook’s IPO as perfectly executed to exploit behavioral biases.  I am not a conspiracy theorist, but even the trading delay on the day of the IPO helped to bring the frenzy to own shares to a fever pitch.  The Facebook IPO and others like it suggest that Wall Street is very effectively playing a game that many investors do not really understand. Continue reading

Cheap Money + Share Buybacks = Bull Market?

The market rally of the past twelve months may appear somewhat baffling in light of the fact that individual investors have been pulling money out of the market.  The S&P 500 is up 22.5% in the last year, while September marks the 17th consecutive month during which investors took money out of equity mutual funds.  The outflows from equity mutual funds are not simply due to investors moving from mutual funds to ETFs.  A recent analysis by Bianco Research demonstrates that including ETF flows does not change the results. Continue reading