My wife and I are here in London, England, after visiting Warsaw, Poland, a few days ago. I’m here to give a lecture on “Hayek vs. Keynes: Who’s on Top?” and to discuss how to apply “Austrian” economics to the financial world.
You’ll note the name of this e-letter, the Skousen Investor CAFE. CAFE stands for Center for Austrian Finance and Economics. I use the Austrian economics of Friedrich Hayek and Ludwig von Mises to help me make investment decisions. They were academics (from Vienna) but their theories have great use in today’s financial markets.
Austrian economics got started with Carl Menger, an economist at the University of Vienna. He got started as a journalist covering the stock market in Vienna. It was there he discovered the principles of subjective cost and marginal values. He learned that the price of stocks was determined by a marginal number of buyers and sellers, not all the shareholders. Thus, he began the “marginalist” revolution in economics. (See chapter 7 of my book “The Making of Modern Economics.” To buy a copy of the book, go to Amazon by clicking here.
One of Menger’s students, Ludwig von Mises, developed the Austrian theory of the business cycle by arguing that paper money inflation causes structural imbalances in the economy and a boom-bust cycle in gross domestic product (GDP), as well as the stock market. His younger colleague Friedrich Hayek developed the model further and won the Nobel Prize in Economics in 1974 for his work.
The Austrian business cycle theory is relevant to today’s financial crisis, because it focuses on asset bubbles in real estate, manufacturing and the stock market as causes of instability.
I’m writing a book now on this subject that will be published by Laissez Faire Books later this year. Stay tuned!
Be sure to read my feature “You Blew It!” I’ll plan to have a new one for you every week. The purpose is to point out a bad decision, a foolish action or an ill-fated statement by a public official, business leader or investment guru.
I have used the phrase within my family for years and they once printed t-shirts for a reunion with those exact words on each one. They learned to take my constructive criticism with a sense of humor and I hope you do, too. My intent is not to ridicule anyone but to point out a mistake that could be corrected, much as advice from a trainer or a coach can turn a faltering athlete into a world champion.
You Blew It: Facebook IPO Burns the Public
Investors sued Facebook and its Wall Street advisers over claims that the social media giant misled them about the company’s business prospects before its record flotation.
“Some insiders and investors were preferred over others,” The Telegraph quoted Darren Robbins, a lawyer for one set of retail investors, as saying. “Everyone made money in this process, but it was the ordinary main street investor who was left holding the bag,” he added. — Yahoo Finance
There’s an old Wall Street chestnut that says “Beware of IPOs — they are like burning matches.”
Early Facebook investors such as company founders and insiders (like Mark Zuckerberg) get into a hot stock offering at bargain prices. Investment bankers like Morgan Stanley bought additional shares at cheap wholesale prices. Who finally pays retail? The public investor who buys at the IPO price at $38 a share or more.
Facebook went public on May 18 at $38 a share, but almost every retail buyer paid more, only to see the stock plummet to $30 over the next couple of days. Apparently, at the last moment, Facebook issued 25% more shares than planned. And now it has come out that Facebook’s guidance is not as rosy as previously predicted.
An IPO is like a burning match. The founders and insiders light the match, pass it along to the investment bankers, and by time the bankers take it public, the match has burned down to the fingers of the investors holding the match.
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The burning match story, which I feature in this week’s “You Blew It!” article, is one of many found in my new book “The Maxims of Wall Street,” the first collection of all the Wall Street sayings. It took me 30 years to compile them.
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Yours for peace, prosperity, and liberty, AEIOU,