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Author: shyam
If recent research (pdf) has to be believed, then the problem with conventional economics is that it tries to model how individuals choose from a range of options. But how do they know what these options are? Many feasible options might not even occur to them. Customers who don’t know of alternative products get ripped off; potential rivals who don’t know the technology or market don’t enter the industry, etc.
The worst part is that we know not that we know not. Decision makers are often unaware that they are choosing in ignorance.
The paper makes some interesting hypothesis:
- Ignorance often goes unrecognized
- Even when we worry, plan, and prepare for the future while explicitly recognizing our ignorance, Consequential Amazing Development, CADs, will occur
Investors tend to make significant errors because much of their training prepares them only for the world of risk and uncertainty, with probabilities that can be estimated. But real life involves a series of amazements, not just contemplated events. Also, most of these are singular occurrences, making it difficult to learn from past mistakes.
Worth a read.
Back in June this year, Apollo Tyres decided to buy US based Cooper Tyre & Rubber (CTB) for more than $2.5 billion, or $35 a share. Apollo was required to use its “reasonable best efforts” to get consents from any parties, like the steelworkers and its Chinese JV partner, whose approval is needed. In the meantime, the markets did not wait to show its hatred of the deal.
Apollo Tyres:
Cooper Tyre & Rubber:
Turns out that CTB has an underfunded UK pension scheme, which has only about two-thirds of the cash it needs to pay its promised pension benefits (a shortfall of £76.5m as at December 2012). And going into the deal, CTB’s management did not disclose that its Chinese partner had flirted with making a bid for the company. The pissed-off Chinese JV partner then organized a strike, put guards at the door and refused to allow Cooper and Apollo access to its financials.
The shit-show doesn’t end there. Morgan Stanely and other bankers involved in the deal have been unable to find buyers for the bonds that were supposed to finance the deal. Apollo was planning to borrow more than $2.3 billion to pay for Cooper’s shares, and had plans to finance its $450 million equity slice as well.
Looks like the only option for Apollo is to stall for long enough that CTB is forced to file third-quarter financial statements. At which point it can try and wriggle out of the deal saying that key financial information was not disclosed during the time of the deal. However, CTB is having none of it. The company has dragged Apollo to court in its attempt to make it sign on the dotted line.
The question is what is Apollo going to do if it is instructed by the court to complete the deal but can’t find the financing promised by its banks? Interesting days ahead…
[stockquote]APOLLOTYRE[/stockquote]
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We are in the middle of what can be best described as the most hated rally of all time. Retail investors have been sellers, having seen similar highs three times already. And economists, who should know better than to opine about the stock-markets, have labeled the rally as “without underlying fundamentals.”
But seasoned investors will know that the market is forward looking and its default setting is “optimism.” Who knows when this rally will end? But as long as it lasts, its time to press as hard on the accelerator as you can.
Go High Beta!
We created an Investment Theme a few days ago that consists of a portfolio of fairly liquid high beta stocks. It has beaten the cr@p out of every other portfolio so far. You can have a look at the theme here: Market Fliers
[stockquote]PRECOT[/stockquote]
Some of the academic research we follow here at StockViz show how bizarre human decision making is. Consider this fine example (pdf):
- Investors get excited by the pre-announcement of the interview and ramp shares higher: from days -2 to 0 (interview day) firms experience a positive 4-factor abnormal return of 1.62%
- Then experience a negative abnormal return of -1.08% over the next ten days.
- There is abnormal amount of trading by individual investors on days the CEO is interviewed by CNBC.
- They keep on buying if the interview was both carried out by attractive anchorwoman and was watched by more male viewers.
It seems that we use a different head to trade when we see attractive women…
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