Tag Archives: finance

The Count of Anti-Crypto

  1. The underlying technology, blockchain, might have uses but a currency isn’t it
  2. Many crypto experts were surprised when governments said that profits from trading in digital currencies were taxable in the same way that as any other capital gains. Why would this be a surprise?
  3. They also claim that it’s great because it’s decentralised. Except, a few companies do a vast percentage of all business meaning that in reality it’s not very well distributed
  4. Much of traditional financial services is not centralised either. There’s no “exchange” for currency trading, for example
  5. The lack of regulation in crypto is considered an advantage, right until the point that one of the few exchanges (see above point about decentralisation) is in trouble and stops accepting sell orders. Regulation is there for a reason
  6. Decentralisation is supposed to democratise trading. Except, trading in crypto is surprisingly expensive. And, just like traditional finance, quickly gets complicated
  7. And it’s slow
  8. Many of crypto’s biggest promoters are economically illiterate
  9. It’s basically a pyramid scheme
  10. Many crypto “experts” claim that it’s possible to reduce the risk of transactions with certain complications. They tend not to use the word “hedging” which is what this is. It’s something that the “old-fashioned” financial services companies have been doing for ever
  11. It’s almost like they don’t understand traditional financial markets
  12. They says it’s progressive and about freedom, but it entrenches existing hierarchies, if anything, more effectively than the existing systems
  13. Except for the use of blockchain, there’s not a lot that’s new. For traditional financial services, regulation means that the worst scams are banned for retail inventors. The “Wild West” of crypto isn’t a feature
  14. And no, this piece is not intended as a defence of the traditional financial services companies or their regulators. They are far from ideal

Taking Stock

Share price movements are kind-of-sort-of-rational but not always intuitive. For example, when Apple has a big keynote and announces some significant product, everyone expresses surprise that the share price goes down straight afterwards. Even many smart people get this wrong (“It isn’t based on logic and reason” – The Talk Show episode 53). I hope to explain why the price dropping actually does make sense in this post.

In doing so I’ll likely make some errors. Some of those will be deliberate simplifications. In other cases I’ll probably just be wrong. But either way, I think the gist, if not the details, should give you a good idea of what’s going on.

I’m going to keep things simple by only talking about the share price. There are other factors (such as dividends) that might reasonably be considered but I think we can get a decent enough explanation without complicating things.

If we only worry about the share price, the obvious way that you make money is by selling the share at a higher price than you bought it for. So, even when you first buy a share you’re making a punt on the future of the company.

For a keynote, where no actual financial information is shared, it’s a pretty simple case of “buy on the rumour, sell on the fact.” Traders heard some of the same rumours about the shiny new iUnicorn that you did. They speculated that people would like and buy this new product and bought some shares. By the time the product is announced, the theory is that the share price already factors in all the up side (profit) of it, so they sell.

It doesn’t matter whether the product is good or bad, better or worse than was predicted, the share price will likely still go down. The next bit of good news that will likely pump up the stock will be an earnings announcement, good launch weekend sales figures, etc., but no more good can come out of this announcement. So sell.

The process for an earnings call are similar though possibly are a little more technical. In addition to any sales figures, traders are also looking at things like the “earnings per share” (EPS). However, in common with a product announcement, at the point of the call, traders would generally consider all the good news to already be factored into the price. Even if the company beats expectations, there’s no more good news to be had so they may as well sell.

For the sake of completeness, let’s also consider a couple of other circumstances that can trigger significant variation in the price. These are typically financial in nature and if they happen at the same time as an earnings call or keynote can exacerbate any already significance price changes.

The most common are options, a derivative financial product that gives the owner the option to purchase a share at a price set in advance, pushing the real share price towards the option price. (A large number of people are going to have to buy the same stock at a set price, so that becomes the price.)

Something else that happens fairly frequently is a share price dropping by a certain amount causing algo trading systems to kick in a sell too. Combine this with the sell off after an earnings call or product announcement and the effects can be way out of proportion with what was announced.

The last one I’m going to mention is when a company is added to a well traded index, such as the S&P 500. This happens because many investors looking for relatively low risk (such as pensions) buy index funds, so as soon as you’re added to the index your shares suddenly become a lot more popular. (Sadly I worked for a company and had shares in it when the opposite happened.)

The short story here is that, unless you’re a professional investor, you probably shouldn’t buy shares to make a quick buck. Buy Apple stock because you like the company and expect to hold onto it for at least a few months. Don’t let the day-to-day peaks and troughs worry you.

My delicious.com bookmarks for December 25th through January 9th

  • The Myth of Japan’s Failure – "Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash. In the fullness of time, it is likely that this era will be viewed as an outstanding success story."
  • Man Embraces Useless Machines, and Absurdity Ensues – Technology: making life simpler.
  • Merry – Sat here with my newborn son and wife, with all my family staying nearby, this post rang bells. It's sometimes important to realise what you have.

My delicious.com bookmarks for December 9th through December 21st

  • exactly – "What if it's a big hoax and we create a better world for nothing?" Looks like we're not going to find out because of a few hold-outs…
  • A Typeface for the Underground – Design and typography on the London Underground. Fascinating stuff.
  • Britain to Levy a One-Time Tax on Banker Bonuses – "To a large extent the levy underpins a quite broad understanding here — even among those generally sympathetic to the industry — that bank profits this year were largely subsidized by the government due to historically low interest rates." The best discussion I've seen of today's pre-Budget speech is, bizarrely, in a US paper.