Some investors are cautious; some investors like risk; and some investors are just eejits, with recent trading in AIB just the latest example of how prices can get out of whack when clueless investors take to the stock markets.
AIB’s recent initial public offering (IPO) will have disappointed investors who bought the shares at artificially inflated prices in recent years. AIB retained a stock market listing in the years prior to the IPO, but the State’s 99.9 per cent shareholding meant only a tiny amount of shares could be traded on the open market. With institutional investors unable to correct mispricings, small investors were able to drive the stock price to levels completely out of sync with the bank’s fundamentals.
When the State announced an IPO was forthcoming, investor interest in the stock spiked, driving shares from €5 to above €9 in the mistaken belief they would gain an advantage by buying in advance of the flotation. As a result, AIB’s market capitalisation soared to above €25 billion, even though it had been widely reported the bank was only worth about half that figure. Anyone who bought at those inflated prices was sitting on heavy losses in the aftermath of the IPO, when the stock price descended to financially realistic levels.
This wasn't the first instance of the so-called eejit trade. Back in October 2013, deluded traders drove AIB's stock price to insane levels – with a market capitalisation of €79 billion, it became the most valuable bank in Europe.
The following year, Minister for Finance Michael Noonan warned the bank was wildly overpriced; hilariously, this was greeted with much outrage online, where some excitable folk alleged the Minister was involved in a sinister campaign to sell off State assets on the cheap.
In 2015, AIB chairman Richard Pym said no "reasonable investor" would think the bank was worth six times its asset value.
Stockbrokers and financial journalists have also been issuing warnings aplenty for years now, to no avail – for some eejits, no share price was too high for AIB.
At the height of dotcom mania in 2000, 3Com decided to sell shares in its Palm Computing subsidiary. The Palm IPO was a roaring success, giving the company a valuation of more than $50 billion. In fact, it was a bit too successful – after the first day's trading, Palm was worth almost twice as much as 3Com, despite the fact 3Com still owned almost all of Palm.
"The mispricing took place in a widely publicised IPO that attracted frenzied attention", notes behavioural finance expert Richard Thaler in his study, Can the Market Add and Subtract?
“The nature of the mispricing was so simple that even the dimmest of market participants and financial journalists were able to grasp it.” Despite being widely publicised, the mispricing persisted for months.
The madness persisted partly because technical difficulties prevented arbitrageurs from correcting the prices. For prices to get crazy in the first place, however, you need investors who are “irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold overpriced assets”, notes Thaler.
In other words, eejits.
Thick about ticker symbols
Eejit traders are prone to buying the wrong stocks. In the weeks prior to Snap’s much-hyped March IPO, traders piled into an entirely unrelated microcap stock, Snap Interactive; shares rose over 160 per cent over four days before it dawned on buyers this was a case of mistaken identity.
This has happened several times in recent years. In 2014, Google bought Nest Labs for $3.2 billion. Unaware Nest Labs was actually an unlisted private company, traders instead piled into a penny stock, Nestor, which soared 1,900 per cent.
Prior to Twitter’s 2013 IPO, shares in Tweeter Home Entertainment Group soared over 2,000 per cent. The company’s ticker symbol – TWTRQ – was similar to Twitter’s (TWTR). Unfortunately, the hordes failed to realise the letter Q indicates a company is involved in bankruptcy proceedings; Tweeter had gone bankrupt in 2007.
Perhaps the greatest case of mistaken identity occurred during the dotcom era. In 1999, AppNet Systems filed for an IPO under the symbol APPN. Some eager beavers just couldn’t wait; even before the company began trading, they piled into Appian Technology, a tiny over-the-counter stock with the same ticker symbol. Ordinarily, the stock traded 200 shares daily; this time, over 7.3 million shares were traded over two days. The stock soared – wait for it – 142,757 per cent.
The Wall Street Journal reported at the time the feverish excitement among online traders. "Just bought 50,000 shares, took 3 transactions to get it done, there r no shares out there, going to run big", one trader said in a chat room. "It isn't clear why investors thought they could trade shares in a company whose IPO is weeks away", the Journal drily noted.
Actually, it was clear – they were eejits.
A Beijing bubble
Few bubbles in modern times can compare to the madness that took hold in the Chinese market in early 2015, and the stock that best exemplified the bubble was surely online video stock Beijing Baofeng Technology.
On its first day of trading in March, the stock jumped 44 per cent from its offer price, the maximum allowed by Chinese regulators. It rose by the daily limit of 10 per cent the next day . . . and the day after that . . . and the day after that . . . and, well, you get the picture. The stock rose by 10 per cent in all but one of its first 34 days of trading. Over the first six weeks of trading, the stock enjoyed a 40-fold rise.
Eventually, reality caught up with Baofeng. By June, it was in free fall, regularly dropping by its 10 per cent daily limit. Baofeng has continued to drift downwards over the last two years.
South Korean singer Psy became a global sensation in 2012 with the release of Gangnam Style, which remains YouTube's most-watched video. Gangnam Style's success was good news for shareholders in semiconductor firm DI Corp, which soared 800 per cent in three months.
Why? DI Corp was headed by Psy’s father. Did the song’s success boost the company’s economic fortunes? No – there was no change in the fundamentals. Rather, it was due to what’s known as the investor recognition hypothesis – the tendency of investors to buy stocks they know about.
Research by Prof Andy Kim showed non-Korean retail investors tended to buy the stock when the song attracted attention in their country. As more people around the world learned of DI Corp, demand for the stock increased and the price soared.
The stock price did crash in 2012, but the shares nevertheless remained more than twice as high as they had been pre-Gangnam Style. Furthermore, they spiked higher again in 2013 after the release of Psy's second hit song. Another crash ensued, followed by another surge higher.
Sometimes – not often, but sometimes – it pays to be an eejit.