Felix Salmon

Why Jeff Bezos cares about his share price

Felix Salmon
Feb 1, 2013 21:32 UTC

Justin Fox has a great little post called “How Amazon Trained Its Investors to Behave”:

When Amazon reports below-consensus earnings, as it did Tuesday, and the share price jumps, as it did after-hours Tuesday and again Wednesday morning, the reaction isn’t quite the puzzle it seems. Slate’s Matthew Yglesias cracked that “Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers.” But what’s really going on is that Jeff Bezos has trained elements of the investment community to expect that low profits (or big losses) now represent investments that will eventually pay off, not signs of trouble.

The weird thing here is the Jeff Bezos training regimen, when it comes to shareholders, is really no different to the Mark Zuckerberg training regimen, or the Steve Jobs training regimen, or even for that matter the Jimmy Dolan training regimen, of Cablevision infamy. In each case the CEO treats his shareholders exactly the same way: disdainfully, by ignoring them. And it turns out that investors, in turn, react in very different ways, depending on the CEO and the company which is doing the ignoring.

Fortune’s Philip Elmer-DeWitt has a good overview of what he calls the “bizarro valuations” of Apple and Amazon, and how it makes very little sense that Apple is selling for 10 times earnings even as Amazon is selling for more than 3,000 times earnings. On the other hand, who cares about such things, beyond stock-market speculators? The one thing that Jeff Bezos and Tim Cook have zero control over is their own stock price; they’re focused instead on the things they can control. Indeed, they probably have much more control over their companies than the vast majority of other CEOs.

Or, to put it another way, both Bezos and Cook are secure enough in their jobs (unusually, for CEOs these days) that they can afford to ignore what investors think, most of the time. Neither is acquiring companies with stock, or otherwise in need of a high stock price, and neither is going to get fired by their board. It’s fascinating to see how an almost-identical attitude towards investors, at two companies which have grown to dominate their respective markets, has resulted in such widely differing valuations.

Which leaves the question: does the stock price matter at all, to Bezos or Cook or Zuckerberg or any other CEO of that ilk? The answer is yes, for one big reason: talent acquisition and retention. If you’re running a tech company, you’re going to be handing out a lot of equity as part of your compensation packages, which mean that your employees are highly interested in seeing the share price rise — a lot. When it’s rising, they’re happy; when it’s falling, they’re not. And so even if you don’t give two hoots about your institutional shareholders, you still have to care about that share price.

That said, while “rising” is always good, in terms of the share price, “stratospheric” is less so. If you’re Jeff Bezos or Mark Zuckerberg, handing out RSUs, it’s pretty hard to make the case that you have a huge amount of upside — just because the share price is already so expensive, and your company is already so fully valued. At Apple, by contrast, the upside is still enormous, and if the team continues to deliver amazing growth figures, then the share price will eventually rise a very great deal.

Amazon and Apple and Facebook are large and pretty mature companies at this point: hires have job security as well as stock-related upside. But they all need talented engineers, and in a weird way it’s the company trading on the lowest multiples which is the most attractive in that respect. Apple’s low current share price could even be a competitive advantage, in the all-important war for talent.



I’m not long AMZN and sadly never have been. I believe they will hit 200 billion in rev by 2018. The reason I think they spend so much of their operating profits on investment is that you are exactly right about their extremely high capital needs.

Amazon wants what Google and Facebook already have… the #1 position in their space across every democratic (or semi-democratic) country on Earth. Google and Facebook are lucky… their capital requirements are basically just lots of servers, even more bandwidth, and a tiny number of employees per 1,000,000 customers.

Amazon deals mostly in physical rather than digital goods and so they need to pay for Wal-mart like infrastructure (warehouses/inventory management systems) once they feel like they have that covered from Seattle to Sidney, to Stockholm, to Singapore… then they start making money.

I’m not saying I buy it… I think AMZN looks richly valued here… but that’s the thesis.

Posted by y2kurtus | Report as abusive

Avis’s smart Zipcar buy

Felix Salmon
Jan 2, 2013 15:30 UTC

What’s the opposite of the winner’s curse? It seems that the biggest winner of the Hertz deal to buy Dollar Thrifty for $2.6 billion was actually Hertz’s mortal enemy, Avis Budget.

Let’s count the ways that the Hertz deal helped Avis: for one thing, it prevented Avis from spending $1.5 billion of its own money for Dollar Thrifty, so that’s a $1.5 billion savings right there. Secondly, it cost Hertz $2.6 billion — way outside Hertz’s comfort zone. (Hertz’s original offer, in 2010, was just $1.2 billion.) Thirdly, it gave Avis all the advantages of consolidation for free: Avis is now competing with just two other big car-rental companies, rather than three. And finally, it freed up Avis to spend $500 million buying Zipcar, which is a much more intelligent and sensible acquisition.

Zipcar is the little company that couldn’t. The model is a very attractive one to consumers, who rent cars by the hour; both gas and insurance are included in the price. But as a business it’s much tougher. When Zipcar launched, gas prices were low, and Zipcar was cheaping out dangerously on insurance. But over time, that changed: gas prices rose, and Zipcar was forced to provide decent insurance coverage when it merged with Flexcar in 2007.

Still, Zipcar was growing fast enough that when it had its IPO in 2011, it had a first-day valuation of $1.2 billion — at the time, just 40% less than the valuation of Avis Budget.

As with many high-flying IPOs, however, Zipcar never fulfilled its promise, and its stock never again saw those heady first-day levels. By the end of 2012, its market capitalization had fallen to $330 million, while Avis Budget’s market cap was $2.1 billion — making an acquisition both easy and obvious. In the past eight months alone, Zipcar stock fell by 40% while Avis stock rose by 60%:

The acquisition solves a number of problems with the Zipcar model. For one thing, it gives Zipcar easy access to the one thing it needs more than anything else: money. The car-rental business is at heart a financing business: you need to be able to finance the acquisition of new cars, efficiently dispose of them once they get too old and too used, and generally make profits by juggling enormous cashflows both coming in and going out. When you’re a small and risky company like Zipcar, that kind of fleet and cash management is much harder than when you’re a giant like Avis Budget.

The other big problem that Zipcar had was that it couldn’t meet demand at weekends: the company’s slogan is “wheels when you want them”, but in practice the cars tended to be sold out at precisely the times that members really wanted them. By merging with Avis, Zipcar gets to offer its members Avis cars when dedicated Zipcars are unavailable.

Meanwhile, from Avis’s point of view, it’s buying the clear leader in what is probably the future of car renting. We’re only at the beginning of a long secular decline in the number of cars owned per household: as America becomes increasingly urban, there’s much less need for households to own a car, or a second car — and it becomes much cheaper to just rent cars by the hour or the day when you need them than it is to own a car outright and just leave it parked and useless for 99% of its life.

What’s more, Zipcar’s insurance snafus notwithstanding, it still has much stronger reputation than either Avis or Budget. People actually like Zipcar, which is more than can be said for any of the big rental companies. It’s vastly easier to rent a car from Zipcar than it is from Budget, and if Budget could just introduce Zipcar’s technology into its existing fleet, that alone would probably be worth the price of the acquisition.

Avis is proving something of a winner at the normally-cursed M&A game: its stock rose when the Hertz-Dollar acquisition was announced, and it rose today, too, on the news that it is buying Zipcar. But if Avis is the winner here, who’s the loser? The big risk in this deal is that while Avis might manage to borrow some of the glow from Zipcar’s halo, the converse will also happen, and Zipcar will end up becoming more like a hated big car-rental company. All of the big rental companies have made some kind of half-hearted attempt to get into the hourly-rentals business, and none of them have gotten much traction; now that Zipcar is part of a much larger parent, it could well suffer the fate of those previous attempts to build rather than buy.

From the point of view of a Zipcar member, then, this deal is worrisome: while it comes with some hope on the weekend-availability front, it also comes with the risk that some of the highly opaque pricing of the classic car-rental business is going to make it into the world of Zipcar. Let’s hope that Avis’s operations people are as smart as its M&A people, and that doesn’t happen.


In most markets, Avis has higher demand on weekdays than weekends, due to business travelers. There ought to be an opportunity to improve fleet utilization since ZipCar needs more cars on weekends, assuming that the logistical details can be resolved, such as having cars at airport locations versus non-airport locations.

I am personally more familiar with car2go than ZipCar. Of the 2, ZipCar looks like a far better fit to combine with a traditional car rental business.

Posted by realist50 | Report as abusive

What’s Ackman’s Herbalife game?

Felix Salmon
Dec 31, 2012 22:27 UTC

Bill Ackman sure knows how to make a splash: his presentation laying out his Herbalife short is rapidly approaching 3 million pageviews on Business Insider, plus many more from his own website. What’s more, it has already made him a lot of money: even with Herbalife stock up more than 12% today, at about $33 per share, it’s safe to assume that Ackman put on his short at between $45 and $50. If John Hempton is right and the short is on the order of $1 billion, then that means Ackman has made more than $300 million in the past couple of weeks.

And as Michelle Celarier notes, that $300 million is going to come in very handy when Ackman puts together his year-end report, not to mention if and when he ever tries to take Pershing Square public. As of the end of September, his fund was down for the year; Herbalife should change that.

Celarier also notes that Ackman’s broadside was carefully timed: it not only came just before year-end, but also came during a Herbalife “quiet period”, during which the company’s retaliatory arsenal is temporarily depleted.

The amount of sheer theater surrounding Ackman’s short — he literally presented his idea from a stage, and followed up his presentation with a big round of media appearances — makes it clear that the presentation itself is part of the trade. Ackman’s an activist investor, who tries to make money by changing the state of the world, and in this case it’s very clear what change he wants to see: he’d like the US government to prosecute Herbalife for being a pyramid scheme.

Ackman says that he has a price target of zero on Herbalife stock, which is extremely aggressive given that this is a company which makes a lot of money every year. The only way that Herbalife goes to zero is if it gets prosecuted for being a pyramid scheme. But there’s no evidence that a prosecution is forthcoming: after all, Herbalife has been around for 32 years, and the FTC has done nothing so far.

Ackman, when asked, says that the purpose of the theater is to bring the “facts about Herbalife” to the attention of people who would otherwise be duped by its sales pitch: if those people knew the truth, he says, they would never sign up with the company. But there’s basically zero overlap between the kind of people who read 334-page slideshows, on the one hand, and the kind of people who dream of getting rich selling Herbalife products, on the other.

The vast majority of Ackman’s presentation is devoted to an attempt to prove that Herbalife is a pyramid scheme. That’s hard: the distinction between an illegal pyramid scheme, on the one hand, and a legitimate multi-level marketing scheme, on the other, is largely in the eyes of the beholder. All of these things look pretty skeevy from the outside, but that doesn’t make them illegal, and people like Kid Dynamite are doing a good job of chipping away at many of the key bits of Ackman’s presentation.

That’s the bit which doesn’t add up, for me. Ackman has a pretty good short thesis on Herbalife even if it’s a legal MLM operation: he thinks it’s running out of markets and demographics to exploit. But he buries that short thesis inside hundreds of pages of heavy-handed argument on the pyramid-scheme front, and claims loudly that he thinks that Herbalife is going all the way to zero.

The problem is that he doesn’t ever spell out his argument, and explain why he thinks it’s probable that Herbalife is going to zero. After all, in order for that to happen, you need a lot of things to break Ackman’s way:

  1. Ackman has to be right about Herbalife being an illegal pyramid scheme
  2. The FTC has to be persuaded that Ackman is right about Herbalife being an illegal pyramid scheme
  3. The FTC has to then make the decision to prosecute Herbalife
  4. The FTC then needs to win its prosecution against Herbalife
  5. The FTC victory over Herbalife needs to be so decisive that the stock goes all the way to zero.

No matter what probabilities you put on each of these events, the chances of them all happening can’t be particularly high. And the initial one — the determination of whether or not Ackman is right about the pyramid-scheme thing — is not even all that important: you can put that probability at 100%, and you still don’t have a compelling case that Herbalife is going to zero.

All of which makes the Ackman presentation look to me like it’s a lamb dressed up as a lion, and that Celarier might well be right: Ackman could just have been trying to engineer the biggest possible year-end drop rather than genuinely betting on the demise of the entire company. It wouldn’t surprise me in the slightest to see this story go nowhere in 2013, with both Ackman and Herbalife quietly dropping the matter rather than continuing to fight for no good reason. Ackman has made a lot of money on this trade already: it’s not clear that he has any particular need to kill Herbalife as a whole.

The question, of course, is the degree to which Ackman has now covered his shorts, and the degree to which he’s still betting on substantial further declines. It could even be that today’s rise was caused by Ackman taking profits on his trade. After all, it’s always nice to be able to cash such things in, rather than just see them on paper.


That not a scheme then great opp. for CEO to purchase bargain HLF shares an make a big buck. But he ain’t buying, is he? Why ain’t he buying?

Posted by skeeps | Report as abusive

Treasury exits GM

Felix Salmon
Dec 19, 2012 19:53 UTC

At some point in the next 15 months, assuming everything goes according to plan, the US government will no longer have a stake in General Motors. Treasury announced today that it’s selling 200 million of its 500 million shares back to GM, at $27.50 per share; it will then sell the other 300 million “pursuant to a pre-arranged written trading plan”. Interestingly, the news that a monster block of GM equity is about to hit the market did not have the effect you might think: GM stock is up 7% today, at $27.27.

This sale raises the tantalizing possibility that the government might actually manage to exit the GM bailout without losing all that much money. It invested a total of $49.5 billion in 2008 and 2009, and has managed to get back $28.7 billion to date; that number is now going to rise to $34.2 billion after the GM buyback. Which means that the government is in the hole to the tune of $14.8 billion, with 300 million shares remaining. If it can sell those shares at $50 apiece, it will even end up making a profit. That’s not likely: the highest the stock has ever traded is $39.48, in early 2011. But the stock is on something of a tear right now, hitting a new 52-week high today, so anything is possible.

GM stock has, frankly, been a bit of a disappointment to Treasury: it burst out of the IPO gate in November 2010 at $35 per share, but rapidly fell back. If you look over the course of its 25-month life, the volume-weighted average price is $27.95 per share, which means that in aggregate, investors in GM stock have lost money on it at these levels.

It’s no coincidence that Treasury’s sale of AIG stock, where the TARP fund is making a profit, was announced before the election, while the sale of GM stock, where the TARP fund will take a loss, is being announced after the election. In the grand scheme of things, a few billion dollars here or there doesn’t really make much difference: the purpose of TARP was never to make money, but rather to provide the last-resort liquidity needed for the nation’s banks and automakers to stay functioning. But there’s a symbolic importance to TARP’s profitability, which is why things like AIG’s favorable tax treatment is never taken into consideration when the numbers are summed. And when the symbols are disappointing, you release the news when it is likely to have zero electoral consequences.

It’s impossible to know why GM stock rose today, rather than falling: Vipal Monga hazards a few ideas, but none of them are particularly compelling. It does seem that the market is pretty happy that GM is no longer going to be a state-owned company — even though there has been very little evidence of meddling from GM’s largest shareholder. Still, the big news here is the fact that the government is able to exit its stake at all. Would that they could do the same with Fannie and Freddie.


But there’s a symbolic importance to TARP’s profitability, which is why things like AIG’s favorable tax treatment is never taken into consideration when the numbers are summed. And when the symbols are disappointing, you release the news when it is likely to have zero electoral consequences.

Posted by kavita11 | Report as abusive

Berkshire’s weird buyback

Felix Salmon
Dec 12, 2012 16:24 UTC

There are a lot of very weird aspects to today’s announcement that Berkshire Hathaway has bought back $1.2 billion in stock.

Firstly, the way that the announcement came out seems incredibly shambolic. The stock market opened, and then just a few minutes later trading in Berkshire was halted, pending a news announcement. The announcement was made, and trading resumed, but there’s really no reason why the announcement couldn’t have been made ten minutes earlier, before the market opened.

Secondly, the buyback took long enough: Berkshire first announced that it was thinking of doing such things back in September 2011, saying that it would buy back stock “at prices no higher than a 10% premium over the then-current book value of the shares”. After that there was nothing, until today — when Berkshire, with its very first first significant buyback, managed to break its own self-imposed constraint:

Berkshire Hathaway has purchased 9,200 of its Class A shares at $131,000 per share from the estate of a long-time shareholder. The Board of Directors authorized this purchase coincident with raising the price limit for repurchases to 120% of book value. Berkshire may purchase additional shares in the market or through direct offerings at no more than 120% of book value.

This smells. “The estate of a long-time shareholder” is clearly code for “an old friend of Warren’s”. When that person died, the estate clearly took the decision to liquidate the entire holding, possibly for fiscal-cliff-related reasons. (There’s a good chance that the taxes on estates and capital gains will rise substantially in 2013.) It’s possible that Berkshire was a little bit worried about the effect that the sale would have on the share price, but it’s unlikely: average volume in the stock is more than 56,000 shares per day, so selling 9,200 shares without moving the market much is pretty easy.

So there’s no particularly good reason why Berkshire should step in and make this purchase just to keep the market price smooth, especially when Buffett says he doesn’t pay much attention to short-term stock-price fluctuations anyway. And there’s definitely no good reason why this particular estate sale should be the catalyst for the Berkshire board breaking its own rules, and buying back its stock at levels far in excess of 110% of book value. (Book value is $111,718 per share, which means that the buyback price was just over 117% of book value.)

Finally, there’s no good reason why the buyback should have been done in this highly undemocratic manner. As we have seen, some $7.5 billion in Berkshire A shares change hands every day: Berkshire Hathaway, as a public company, made the decision many years ago that the stock market was the best place for its shares to trade. And yet, when it came to its first-ever stock buyback, Berkshire decided that it didn’t want to go to the stock market after all, and instead just did a bilateral side deal with the estate of a long-time shareholder.

Buybacks are considered a good thing, on the stock market, for three reasons. Firstly, they reduce the number of shares outstanding, which means that the value of the remaining shares goes up: the company is worth the same amount, so the value per share is higher. Secondly, they provide an extra bid in the market, which helps support and drive up the share price. And thirdly, they give shareholders the opportunity to sell their shares back to the company: if they want to sell where the company is buying, they have that option. And options are worth money.

Berkshire, with this buyback, achieved the first of those three reasons, but punted on the other two. It didn’t provide a bid in the market, and it didn’t give its shareholders that lovely marginal option of selling their shares to the company rather than to the traders who are in and out of the market every day. Instead, it decided to give special treatment to a single long-term shareholder.

The whole point of the stock market is that shares are fungible, and that all shareholders are equal. Berkshire has violated that principle today, for no good reason — while also breaking its self-imposed discipline of only buying back shares if the price is below 110% of book value. If you’re going to do a buyback, this is pretty much the worst way to do it.

Update: Apparently I shouldn’t trust Yahoo Finance, and when it reports volumes in BRK-A, it’s actually overstating them by a factor of 100. i.e., when it says 90,800 shares were traded yesterday, in fact that means that 908 shares were traded yesterday. Sorry.

Update 2: Ben Berkowitz correctly points out that this is Berkshire’s second buyback. It previously bought back $67.5 million of its shares from September 2011-December 2011 and disclosed the repurchase in its 10-K.


@BernardoCM – you’re not missing anything; it’s all the others who are looking for ghosts and have convinced themselves that they see them, particularly this fellow -

“… it still seems like an insider got early access over common shareholders.”

Early access to what – to sell low before the stock popped? The only guy who might have gotten screwed on this deal was the dead guy whose estate may have sold cheap – he’s past caring about that now though. (If Buffett hadn’t done the buy, odds are the estate would have gotten even less.)

Buffett made $3k a share on the 9k shares yesterday – like he has something to apologize to anyone for?

Posted by MrRFox | Report as abusive

Is stock-picking just another hobby for men?

Felix Salmon
Nov 28, 2012 20:55 UTC

I had a fascinating lunch, a couple of weeks ago, which lodged in my mind the idea that stock picking, at least when practiced by individuals, is best analyzed as an upper-middle-class hobby rather than as purely profit-focused investing activity. Once you start looking at it that way, suddenly a lot of behavior, which looks irrational under most lights, starts making a lot of sense.

For instance: subscriptions. These things are serious money-makers, whether they’re old-fashioned newsletters, whether they’re Barron’s subscriptions ($149/yr), or whether they’re slightly more high-tech products like the various subscription products at thestreet.com (between $152/yr and $1,040/yr), Minyanville (between $499/yr and $899/yr), or, now, at Seeking Alpha ($2,388/yr).

These prices aren’t always completely transparent (good luck trying to find the Minyanville prices on their website, for instance), but they’re high for a reason: they’re sending the message that the subscriptions are meant to make you money. At the same time, however, if you compare these sums to the sort of money that the upper-middle classes spend on, say, golf, then they don’t look quite so large. A golf habit is unlikely to cost you less than $5,000 a year, and can cost tens of thousands, not including the extra amounts that many people pay to buy real estate on the golf course.

What’s more, the number of golfers in America is significantly larger than the number of stock-pickers. This is a niche market, which means again that prices need to be high: you’re never going to sell millions of subscriptions to anything.

One thing worth noting here: stock picking, even more than golf, is an overwhelmingly male hobby. Put aside all the mathematics about how individual investors consistently underperform the market and pay enormous fees to various financial-service middlemen; all you really need to know is that if something is done only by men, it probably isn’t particularly sensible.

Still, the Seeking Alpha model is an interesting one: they’re basically crowdsourcing their subscription product, by offering their contributors between $100 and $500 per article (or more, if the article gets lots of page views), if they consider the post high-quality enough to qualify for the Seeking Alpha Pro product.

You can do the math: Seeking Alpha says that it wants to feature five “Alpha-Rich” articles per day on its pro site, for which it will pay $500 apiece. Let’s say it also features a couple of dozen Pro articles at $100 a pop: that adds up to an editorial budget of $5,000 per day, or about $1.25 million per year. Divide that by $2,388, allow some budget for in-house editors and the like, and the product looks like it will break even once it gets to about 600 subscribers. Which is not all that many, considering Seeking Alpha gets about 4 million visitors per month from the US alone.

I would never recommend any stock-picking subscription, just as I would never recommend stock-picking. But the Seeking Alpha model is quite a clever one: the articles are behind a paywall for 1-3 days, then they get opened up to the public, where they can accumulate a decent comment stream and give the author (as well as the subscription product) the oxygen of publicity. After that, they go back behind the paywall, because even old analysis is valuable when you’re dealing, as Seeking Alpha wants to do, primarily with undercovered small-cap stocks.

What’s more, it stands to reason that a crowdsourced product is likely to provide more value than product with just one or two authors: no individual can come up with that many insightful ideas, and Seeking Alpha Pro is able to prominently feature ideas from contributors who might only have one or two great analyses per year.

Still, the ultimate value of any such product is ultimately likely to be negative rather than positive, if only because once you’ve paid for it, you’re going to want to act on it. And the minute you start trading stocks on your own, you become the dumb money.

How much is the real cost of a subscription, then? The $2,388 a year is just the up-front cost, but on top of that you need to layer on your trading fees and your general underperformance. What’s more, if you’re subscribing to Seeking Alpha Pro, you’re probably subscribing to other products, too. Call it $5,000 a year, all-in.

Which is actually not that much, compared to other hobbies: I know people who can spend $5,000 on a single bicycle. If you’re into classic cars, $5,000 is nothing. And similarly, if you’re skiing or flying around in small planes or even just taking a luxury vacation once a year, $5,000 can be a relatively modest sum for a reasonably affluent person. And none of those hobbies come with the extra thrill of dreaming that they could end up being highly profitable.

One thing I would note, though: from a financial-media perspective, you’re limiting yourself enormously if you spend too much time chasing that small group of hobbyists — especially if you’re not trying to sell them subscriptions. Look at the enormous number of websites which put stock tickers next to company names, so that the hobbyists can see exactly what the stock in question is doing that day. It makes the site seem as though it’s targeted at silly males, rather than at a broader, smarter audience.

As a rule: if you want to attract women (and most men for that matter) as well as the stock-picking men, get rid of those tickers and sparklines and constant reminders of what the market did today. Most of the hobbyists are perfectly capable of reading a news article about Apple without being told what the company’s ticker symbol is. But the rest of us find such things incredibly annoying.


Sound investing is easy. Buy quality, let it ride.

Stock-picking is devilishly hard. Keeps me humble! HPQ anyone? :)

Posted by TFF | Report as abusive

Is executive insider trading a problem?

Felix Salmon
Nov 28, 2012 07:24 UTC

The WSJ is making a very big deal of its latest investigation into when and how executives trade stock in their own companies. But I’m not particularly impressed: it seems like much more of a fishing expedition than a wide-ranging scandal.

Certainly the WSJ contrives to be shocked at stuff which really isn’t shocking at all:

Douglas Bergeron, CEO of VeriFone Systems Inc., set up a trading plan in January 2011 and then in late March sold nearly $14 million of VeriFone stock. In trades from March 28 to March 30, 2011, he received between $55 and $57 a share.

On April 5, VeriFone’s stock began a long slide—exacerbated by a May 12 Justice Department lawsuit to block a VeriFone acquisition—that left the shares just above $30 in August.

There’s no way that the Bergeron would have known about the Justice Department lawsuit in March, when the suit didn’t appear until mid-May; what’s more, VeriFone is on the record as saying that he didn’t know about it. So it’s hard to see what the WSJ thinks it’s doing, here.

More generally, the WSJ’s methodology seems designed to produce exactly the results that it came up with:

The Journal examined regulatory records on thousands of instances since 2004 when corporate executives made trades in their own company’s stock during the five trading days before the company released material, potentially market-moving news.

Among 20,237 executives who traded their own company’s stock during the week before their companies made news, 1,418 executives recorded average stock gains of 10% (or avoided 10% losses) within a week after their trades. This was close to double the 786 who saw the stock they traded move against them that much.

It’s not obvious what the WSJ considers to be “material, potentially market-moving news”, but I think that two assumptions are probably fair here. Firstly, stocks tend to take the stairs up and the elevator down: if there’s a sharp move in a stock, it’s much more likely to be a fall than a rise. Secondly, executives trading in their own stock are much more likely to be sellers than buyers. They get awarded stock as part of their compensation package: that’s not trading. And once they’re awarded it, they have every right to sell it — and selling it makes perfect sense, in terms of portfolio diversification if nothing else.

Put those two assumptions together, however, and you get exactly the result that the WSJ is so shocked by. Let’s assume that nothing untoward is going on at all, and executives are trading their stock all year long. Assume too that most of those trades are sales. Then assume that the WSJ looks only at the trades which happen before sharp moves in a stock. Since most of those trades are going to be sales, and most of the sharp moves are going to be downwards rather than upwards, it stands to reason that the executives are going to look like they were avoiding losses, rather than seeing the stock move against them.

On top of that, the WSJ seems to deliberately elide key information at points. For instance:

Mr. Zinn bought about $800,000 of Micrel stock in the four days before Micrel put out an earnings news release saying the company hadn’t been significantly affected by the slowing economy—and announcing that it would begin paying a dividend. Within a month, the shares Mr. Zinn purchased just ahead of this news were up 27%.

Mr. Zinn’s timing was good again in early 2010. He bought about $295,000 of Micrel stock during the two trading days before Micrel executives made news at an investor conference by saying the company’s business was improving. Within a month, the stock rose 36%.

The WSJ doesn’t provide dates or stock charts here, and it’s far from clear what “made news” means in the context of executives saying upbeat things about their own company. But what is clear is that the WSJ tells us only what happened to the stock “within a month”, rather than between the trades and the news. If the stock moved after the news was public, that should be neither here nor there.

Not all of the WSJ’s examples are this dubious. But by its own admission, the paper examined thousands of trades, all of which took place in the run-up to potentially market-making news. Even if they were all perfectly innocent, statistically speaking some of them would end up looking suspicious. If you suspect bad-faith dealing, and then you look for it in a certain place and then you find it there, that’s a bright-red flag. But if you had no reason to be suspicious in the first place, then you need a lot more evidence. It’s a bit like discovering that two of your friends share a birthday: it’s a coincidence, but it’s not particularly noteworthy, because statistically speaking it’s pretty much certain that two of your friends share a birthday.

In order for the WSJ’s findings to be newsworthy, then, we’d need a pretty solid analysis of how many cases like this you’d expect just from random chance — and that analysis seems to be missing. The closest we get is this:

“We’ve found a lot of evidence that these insiders do statistically much better than we’d expect,” said Lauren Cohen, an associate professor of business administration at Harvard University who co-wrote a study published this year about the performance of insiders who time their trades. “The perch that they have—they not only have proximity to this private information, but they can actually affect the outcomes.”

There’s no link to the study, but I assume the paper in question is this one. It’s an interesting paper, but it doesn’t use the WSJ dataset, and it doesn’t look for “potentially market-moving news”: it just takes the results of executives with a regular and predictable share-trading pattern, and compares them to the rest.

Altogether, then, I think there’s less here than meets the eye. There might be future shoes to drop, and some of the trades they have found could turn out to be illegal. But I would have preferred less tarring of possibly-innocent executives, and more substantive discussion of what could actually be done to improve the system. The WSJ makes the case that the current system of 10b5-1 plans, where executives pre-plan stock sales, is flawed. But how could it be fixed? You could ask executives to commit to a fixed schedule of purchases or sales long in advance, but all such schedules have to be editable somehow, and in any executive’s life things happen which can drastically change that person’s need for liquidity.

And then more conceptually there’s the whole problem with the idea that executives can’t trade when they have material nonpublic information about a stock — which is just silly at its heart, because executives always have nonpublic information about a stock, and that information would nearly always be considered material for, say, a third-party hedge fund.

The SEC’s rules, as a result, are always going to be a bit unsatisfying, because they need to reconcile two irreconcilable facts: that executives have material nonpublic information, and yet at the same time they have to be able to sell their stock somehow. Lauren Cohen’s paper demonstrates that nothing untoward takes place if the stock sales are scheduled long in advance, taking place on a regular and predictable schedule. But life doesn’t always happen according to regular and predictable schedules, and it’s very far from clear that the problem here is big enough to justify a sweeping new regulation, just to try and prevent an unknown but possibly very small amount of insider trading.


Insider trading from corporate executives is a real issue, but even though it raises many concerns, still executives pays have to be linked to performance indices. Executives’ interest must be aligned in some kind of way with the one of shareholders. Of courses, others metrics can also raise issues, for example linking bonus to earnings performances can lead to accounting manipulations. I believe the best way is to diversify the executive’s pays and keep bonus at a reasonable level.

I strongly think that incentives measures have to exist; the system just requires more transparency from the employees and more compliance rules from the company side.
Plus the question of equity holdings can also be extended to executive’s relatives. Should the CEO’s husband or wife disclose his or her holdings in the company?

Posted by Rom20F | Report as abusive

Charts of the day, equity volume edition

Felix Salmon
Nov 27, 2012 21:14 UTC

Yesterday, ZeroHedge published this chart:


Which reminded me of this chart, which Cardiff Garcia found in August:


Both of them are telling the same story: that equity volumes, far from showing any kind of post-crisis rebound, are continuing to fall fast.

It turns out that this is not a purely US phenomenon. Indeed, the global picture is pretty much exactly the same as the US picture. Here’s data from the World Federation of Exchanges:


What all of these charts shows is that volumes are were on a secular uptrend until the crisis, they had a crisis-related spike, and then they’ve been on a secular downtrend ever since. The question is why.

The uptrend bit is easy: volumes, at least until 2009, always went up over time, especially when they were helped along by things like decimalization and high-frequency trading. But what explains the downtrend? It’s not the decreasing number of stocks: that might explain a bit of what’s going on in the US, but it wouldn’t explain the rest of the world.

Instead, I think that what we’re seeing is the slow death of the stock-market investor — the kind of person who subscribes to Barron’s, idolizes Warren Buffett, and thinks of stock-market investing as a do-it-yourself enterprise. During the dot-com bubble, lots of people thought they were really smart when it came to stock-market investing, and then after the dot-com bubble burst, the rise of discount brokerages helped encourage new people to step in to the market and try their luck.

Nowadays, however, the message is sinking in: it’s a rigged game, you can’t win, and you’re better off with a passive strategy.

The fact is that volume, in and of itself, is not a particularly useful phenomenon: it’s the shallowest and most useless form of liquidity. If the primary purpose of the stock market is to allocate capital to companies which need it, then you could happily lose 90% of the volume in the market without a noticeable decrease in utility.

I’ve got a post coming up about stock-picking as upper-middle-class hobby, but it does seem to me that it’s a hobby which is declining in popularity. That’s bad news for stock volumes, bad news for stockbrokers, and bad news for much of the financial media. But it’s good news for upper-middle class household finances.


Just checked — three-year total transaction fees of 0.4% *and* most of that trading pushing around a fraction of the total to see if more active trading can beat buy-and-hold based on a similar philosophy. (It doesn’t seem to make much of a difference.)

That’s cheaper than VFINX.

Posted by TFF | Report as abusive

How Steve Cohen moves stock

Felix Salmon
Nov 26, 2012 19:43 UTC

Eric Hunsader, at Nanex, has managed to put together some fantastic charts of what exactly happened in Elan, the stock at the center of the latest big insider-trading case.

First, here’s the big picture:


The red arrow shows the period “throughout 2007 and up to July 2008″ during which SAC “established a substantial long position” in Elan. The blue arrow points to the frantic week during which SAC sold off more than its entire holding, ending up with a significant short position, just before the stock plunged.

When Elan opened for trade on Monday July 21, 2008, it was at a multi-year high of more than $35 per share, and SAC’s long position was massively in the money — after all, they had been buying since it was less than $15. And then SAC started selling, aggressively.

Over a four-day period, SAC sold its entire position of 10.5 million shares between Monday and Thursday, at a super-high average price of $34.21 per share. The head trader, who said that he sold the stock “quietly and efficiently through algos and darkpools”, continued to sell. By the end of the trading session on the 29th, he had sold more than 15 million shares for more than $500 million. The complaint notes that the SAC trading “constituted over 20% of the reported trading volume in the seven days prior to the July 29 Announcement.”

What does that kind of massively one-sided selling do to a stock price? This:


Basically, Elan moved sideways for most of the time that the stock was being sold. Day 1 was great, Day 2 was decent until the end of the day, Day 3 started off well but then deteriorated, Day 4 was horrible, Day 5 was much better, Day 6 had a good morning and a gruesome afternoon, and Day 7 was pretty good.

And by the end, in the wake of $500 million of concerted selling in a pretty illiquid stock, the share price was about $33.50 — pretty much exactly where it was on the Friday before the selling started.

Eric’s detailed day-by-day charts are well worth looking at, but for me there are two big-picture lessons here. The first is that SAC is an amazingly good trading shop; we probably already knew that. And the second is that any time you see a market reporter blaming “selling” for the fact that a stock went down, you can take that with a pinch of salt. Because the lesson here is that an absolutely enormous amount of very real selling can have a surprisingly small effect on a stock’s price.


Too many of you pay attention to the wrong things. Too many wannabe economists mixed with egos.

Posted by SenorAlpha | Report as abusive