Author｜Man and God work together, title picture: Visual China
1/4 “Winner’s Curse” in the auction
Every year, I will write an article introducing the main theories of the Nobel Prize in Economics that year. It used to be written on the public account of “Man and God Working Together”, but this year’s award-winning Paul R. Milgrom and Robert B. Wilson’s auction theory, I think It is more suitable for writing on the “Ideological Stamp”, a public account that talks about investment.
For example, auction theory explains the “winner’s curse” phenomenon in auctions, that is, people who successfully bid for a lot are more likely to regret it. This phenomenon is also a common phenomenon in investment-staged winners are easy to run for a long time. lose.
The “winner’s curse” is not only a psychological phenomenon, it is also a real result: Some economists calculated the pre-tax rate of return of 1,223 crude oil mining lease auctions in the Gulf of Mexico from 1954 to 1969, and found that these companies’ The average present value loss is about US$192,128 per lease, of which only 22% of the leases are profitable, 16% of the leases are not profitable, and 62% of the leases are nothing.
The two economists used mathematical models to prove that the “winner’s curse” must exist in certain auction formats. They also personally designed a series of methods to make the auction results more reasonable according to the different characteristics of the lot.
Is the “winner’s curse” in investing the same thing as the “winner’s curse” in auctions?
The auction theory cannot be explained directly. The mechanism of stock trading is the continuous bidding between the seller and the buyer, which is different from the auction, but if one of the actions is taken out, it still has a lot in common with the auction.
Among the four basic forms of auctions, there are two types of open bidding. One is the “British auction”, which means bidding from the lowest to the highest, and the highest bidder is awarded. The other is the “Dutch auction”, which means Quotes from high to low, the highest psychological price is the first bidder.
Another behavior similar to auctions is “tendering”. The only difference is: the bidder in the auction is the buyer, while the bidder in the “tendering” is the seller-selling construction or design labor to get money.
Stock trading is a simultaneous auction and bidding. From this perspective——
When the stock price is rising unilaterally, buying is equivalent to a “British auction”, because the stock price continues to rise, and if you want to bid successfully, you must pay the highest price; and the seller is in the “Dutch auction” The bidders always have a price prepared in advance, and only at this price are you willing to sell. Of course, the buyers and sellers of stock transactions are opposite to the buyers and sellers at auction. To be precise, it is called bidding-“Dutch bidding”.
When the stock price is falling, buying is equivalent to a “Dutch auction”. As the stock price continues to fall, you have to judge when to sell; while selling is equivalent to a “British auction”, the stock price keeps falling. If the bid is successful, the lowest price must be paid (again, buyers and sellers are the opposite, which should be called “British tender”).
In this way, auction theory can explain many phenomena in stock trading, including the “winner’s curse.”
2/4 private value and recognized value
The 1996 Nobel Laureate in Economics, William Vickrey, is the originator of “auction theory”. He believes that auction items have two values: one is “recognized value”, such as Van Gogh’s Paintings can be sold for several hundred million, because this is the price most buyers are willing to accept; the other is “private value”, because the value of auction items is different for everyone, and the bid of a person who likes Van Gogh is often higher than The market price is high, and the higher part is the “private value”.
“Private value” is the basis of auction. If a commodity has only “recognized value”, it is like an ordinary 100 yuan banknote, and no auction is required.
Because the same thing has different value to different people, the one with the highest “private value” bids the most, so there is a special form of resource allocation such as “auctions”.
The most famous auction in the investment world is “Buffett’s Lunch”, explained by auction theory, this is a classic auction item with only “private value” and no “recognized value”.
If you are an ordinary person, this lunch is worthless, but for those who admire Buffett or want to use Buffett’s reputation to achieve their goals, it is of great value.
These auction items only have “private value”. The auctioneers are only setting prices for their own “private value”. Everyone is different. There is no recognized standard. Naturally, there is no “winner’s curse.”
The reason for the “winner curse” is that most of the items being auctioned have both “private value” and “recognized value”, and the auctioneer has distorted it in pursuit of “private value”. Recognized value”.
A classic example of auction theory: There is a sum of money in a black box, and no one knows the specific amount, but there is some information to estimate the approximate range. Now let a group of people bid, and the higher price will get the final result. How likely is a “winner’s curse”?
It is not difficult to imagine that the more information provided, the more people guessed, and the final guessed average number must be closer to the real situation. If everyone bids according to the guessed money, the highest bidder must be higher than the average price, that is, higher than the real money.
This is the “winner’s curse.”
Of course, the actual situation is more complicated. The “winner’s curse” may also be bad for sellers. Because bidders are worried about the “winner’s curse”, they will lower their bids. If the calculated figure is 50 yuan, they will probably only bid 45 yuan. If there are not many guesses, the final bidding result may still be lower than the seller’s psychological expectations. .
So the “winner’s curse” is generally not conducive to auctions. To solve this problem, we must first clarify a problem: Since the amount of money in the black box is fixed, why does it have “private value”?
First, because the information given by the seller is not clear, different people calculate different results, which is the main cause of “private value”.
So in the current auction, the auctioneer will definitely give enough information, on the one hand to eliminate the “winner curse” formed by bidders’ blind bidding, on the other hand, it can also help bidders to judge the “recognized value” in order to eliminate Worried about “winner’s curse”, dare to bid.
Second, everyone’s risk appetite is different, some people have low risk appetite and don’t like itThe feeling of losing money is more likely to offer low prices; while some people have a high risk appetite and are more likely to pay high prices to strive for opportunities to make money. Risk appetite is also a kind of “private value.”
Third, it is related to the auction format. Among auction items that have both “private value” and “recognized value”, “British auctions” are most prone to generate high prices and are more prone to “winner curses.” “Dutch auctions” have lower prices and are easier to fall below the seller’s expectations. This is also one of the theoretical achievements of Milgrom, one of the Nobel Prize winners this year.
Milgrom believes that the more transparent the bid, the more communication between bidders, the more susceptible to others’ bids. This is particularly obvious in buying stocks in a bull market: before the market opens, you have a psychological price to buy, but if the stock price breaks through this price as soon as the market opens, and the higher it rises, you will have a high probability of being hot-headed and chasing higher. At the moment of the deal, you begin to regret it.
The above are some of the more famous viewpoints in the “auction theory”. Let’s take a look at how they affect our investment decisions.
3/4 “Recognized Value” and “Private Value” in Free Cash Flow Discounting
As mentioned earlier, there are some auction-like mechanisms in the pricing of stock prices, so we can also use auction theory to see-for example, how much of Maotai’s stock price is “recognized value” and how much is ” Private value”?
The most basic valuation theory in value investing believes that the market value of a company is equal to the discount of future free cash flow. This is a definition that includes both “recognized value” and “private value”.
Free cash flow, that is, the cash income generated by the company’s operating activities after deducting capital expenditures. This is supported by objective data. Therefore, Future free cash flow belongs to the valuation ” Recognized value” section.
But because the money is “future”, to assess their present value, they must be discounted. Discount is essentially the expected return, which is a subjective criterion. Some people invest in Moutai to make a fortune, with an expected return of at least 20%; some people invest in Moutai to preserve value, as long as it is higher than the risk-free return A few points, such as 6%, is OK.
The price of the low discount rate is higher than the price of the high discount rate. If you want to buy a company’sMost of the investors are low discount rate, so stock price must be high. So what kind of company is favored by low discount rate?
A low discount rate represents a low expected return. Since the expected return is low, I have to compensate from the low risk. In the long run, high certainty of operation means low risk.
As the auction theory says, the auctioneer must give enough information to help the bidders confirm the value, so that investors can be relieved of the “winner’s curse” and dare to bid at the valuation. For example, why Van Gogh’s paintings are expensive, not only because of the high value of the paintings, but also because of the stable value. Because Van Gogh represents the artistic style of a special period, and the painter is dead, the supply is fixed, and the future is more certain.
Moutai, as a luxury product with the most Chinese characteristics and a “hard currency for gifting” by the Chinese, its “recognized value” is relatively transparent. Naturally, its pricing is more highly valued by “low discount rate investors”. Decided.
The auction theory also suggests that short-term stock price fluctuations hurt investors.
Milgrom’s theory tells us that when there are both “recognized value” and “private value”, “British auctions” are more likely to disadvantage bidders and fall into the “winner’s curse.”
As I said earlier, when stock prices are rising, buying is equivalent to bidders in “British auctions.” As the rising atmosphere becomes stronger, it is easier for people to exaggerate the “recognized value” and grab Those who come to stocks fall into the “winner curse” that makes short-term money but is stuck in the long-term.
When the stock price falls, the selling order is equivalent to the bidders in the “British auction” (or British tender to be precise). Everyone is vying to ship at low prices. As the falling atmosphere grows stronger, It is easier for people to ignore the “consensus value”, and those who sell stocks fall into the “winner curse” of short-term loss reduction but long-term loss of bottom chips.
4/4 “High prosperity strategy” and “Low valuation strategy”
In the bull market, the most optimisticBeing able to hold stocks, in a bear market, the more pessimistic people are, the less they have the desire to buy bottoms. These people are all stage winners, but these “winners” rely on excessive pursuit of immediate interests.
In the long run, however, if you cannot sell stocks in a bull market atmosphere and cannot find low-priced chips in a bear market, this is the “winner’s curse.”
Tianfeng Strategy has a report “Which is More Important Valuation or Profit”. Through a backtest of A-shares, it analyzes the return-to-profit comparison of high-prosperity strategies and low-valuation strategies.
The so-called “high prosperous strategy” refers to buying companies with relatively high performance growth in the current quarter. These are often the strongest varieties at the time; the “low valuation strategy” is to buy PE or PB relative to the historical percentage For companies with a lower proportion, the report concludes:
If you are looking for relative returns within one year-equivalent to the ranking of fund performance, “high prosperity strategy” is the best strategy, that is, buying stocks with high prosperity is the most important (ie performance Short-term growth), and valuation is not important;
But if you are pursuing an absolute return of more than 3 years-that is, the goal of individual investors, then the “low valuation strategy” is a better method, that is, buying the historical valuation range percentile Low (note, not low PE) stocks-must be those sectors with relatively low prosperity.
At the auction site, most bidders have made sufficient preparations in advance and have a clear psychological expected price. However, in auctions, with more disclosure of lot information, as the atmosphere created by auctioneers upgrades, and more importantly, bidders frequently raise their placards, prices have risen all the way, and the fear of losing the lot has grown deeper… these accumulations To a certain extent, after the price breaks through your psychological price, it suddenly accelerates and becomes endless pressure. You finally shout out the price that makes you fall into the “winner’s curse”.
It’s the same psychology. Most value investors think they are long-termists, knowing that “long-term returns, compound interest growth” is the most important thing, but they often fall into the “true fragrance temptation” of ranking pressure or short-term returns. “Winner’s Curse”.
No matter how much the investment ability is improved, we are always facing the irrational challenges deep in our hearts.
First published on the WeChat official account of “Ideology Stamp (ID: sxgy9999)”, it describes the concept and method of value investment.