So I've begun my first foray into trading on the LindeX for profit, as opposed to simple conversion. It seems to be going well so far - the worst case scenario is that I could get stuck with surplus US Dollars that I couldn't get rid of. Oh darn.
It seems to me that the profitability at the current best rates (Sell = L$265/USD, Buy = L$276/USD) approaches 0.005 or so as the amount of Lindens trades increases to infinity. This takes into account the 3.5% transaction fee on the sell side, but disregards the $0.30USD fee on the buy side (argument: as the amount of money trades increase, the 30 cent fee becomes insignificant on the total rate of return). Here's the equation, for those interested:
(1 - .035) * 276 / 265 = 1.00506604...
I've also noticed that those selling Linden Dollars appear to be smarter than those buying them. The reason is because I sold my Lindens pretty quickly, meaning there were lots of market buys (people trading USD at whatever rate for L$). However, my USD have been sitting tight for over 24 hours now, despite the quantity offered at 276 being much lower than that offered at 265. That means that not as many SL'ers are pushing the "sell at market" button when they go to sell their Lindens. Interesting, and slightly reminiscent of P.T. Barnum.
Any hints for me from those of you out there who have more experience than I do in this realm?
GM
P.S. I have a cute Excel workbook for my trades, if anyone's interested. Appears to be accurate within 0.01USD, although your results may vary.
Tuesday, January 29, 2008
Saturday, January 26, 2008
Irony
From an announcement on the Ancapistan Capital Exchange (ACE):
FWD IPO Reversed
Due to drastically insufficent investment, this IPO, launched December 5th, 2007 does not appear likely to complete. For this reason we are reversing this IPO and returning funds to investors to reinvest elsewhere. We will keep you apprised of the CEO's future plans should they arise.
Interesting.
I didn't have a chance to see how FWD's IPO was going, but the ACE IPO, running concurrently on the same exchange, is 10.8% subscribed and has been listed since the start of the exchange. I would say it is suffering from "drastically insufficent investment" as well, but it stays on.
I leave my readers to draw conclusions as they like.
FWD IPO Reversed
Due to drastically insufficent investment, this IPO, launched December 5th, 2007 does not appear likely to complete. For this reason we are reversing this IPO and returning funds to investors to reinvest elsewhere. We will keep you apprised of the CEO's future plans should they arise.
Interesting.
I didn't have a chance to see how FWD's IPO was going, but the ACE IPO, running concurrently on the same exchange, is 10.8% subscribed and has been listed since the start of the exchange. I would say it is suffering from "drastically insufficent investment" as well, but it stays on.
I leave my readers to draw conclusions as they like.
Monday, January 21, 2008
Par Value
I'd like to take you all into a land that is not my expertise, but is so overly used and abused in the SL Capital Markets that it is necessary to visit once in awhile. That land is accounting, and we'll be travelling to the isle of stockholder's equity in this article, for a topic on the idea of par value of shares.
First, however, it is absolutely vital that everyone who travels to the land of accounting learn the balance equation. This equation is tattooed on the skull of every accountant and accounting major, and they have it in their minds at all times. This ancient secret of bookkeeping reads:
This is how I found an error in the SLR balance sheet, and posted about it here.
The assets and liabilities section are fairly straightforward. It seems to be that equity section that trips people up. For that section, I'm going to highlight how to figure the values placed in the "Common Stock" and "Paid-In Capital" lines, because I think it's a topic that is not emphasized enough.
Contrary to about every balance sheet I've looked at in SL, "Common Stock" does not refer to the market capitalization (shares * price) of a company. Instead, when a company sells stock, they should also set a par value for the stock, which is a fictional, very low (L$0.01 is what I've been recommending to those that ask) value to place on the shares. The remainder of the cash you receive is then added to that "Paid-In Capital" line, whose full name is actually "Paid-in capital in excess of par value." When you see the full name, it makes more sense.
Why bother correcting these? Well, if you treat your market capitalization as your equity section, then the accounting equation has to have correspondingly large assets or liabilities to keep in check. This is especially true if you kept a lot of shares back from public holdings. An example would help show this:
Suppose XYZ creates 10,000,000 shares, and sells them for L$1 each. Let's suppose the day afterwards, XYZ stock hits L$3.00 per share. If we use market value on the balance sheet, the company has spontaneously gotten L$20,000,000 richer! But in reality, nothing changed, so this is not an accurate picture.
Instead, the company should record (in my opinion) L$100,000 as common stock, L$9,900,000 as paid-in capital, and $10,000,000 as cash. Then, in subsequent balance sheets, leave the L$100,000 alone, and adjust other lines around it. This will be a better representation of XYZ's true value.
Disclaimer: I'm not an accountant. I'm an actuary. Real accountants, feel free to critique this as needed.
Source: This page of AccountingCoach.com
First, however, it is absolutely vital that everyone who travels to the land of accounting learn the balance equation. This equation is tattooed on the skull of every accountant and accounting major, and they have it in their minds at all times. This ancient secret of bookkeeping reads:
ASSETS = LIABILITIES + EQUITY
This is how I found an error in the SLR balance sheet, and posted about it here.
The assets and liabilities section are fairly straightforward. It seems to be that equity section that trips people up. For that section, I'm going to highlight how to figure the values placed in the "Common Stock" and "Paid-In Capital" lines, because I think it's a topic that is not emphasized enough.
Contrary to about every balance sheet I've looked at in SL, "Common Stock" does not refer to the market capitalization (shares * price) of a company. Instead, when a company sells stock, they should also set a par value for the stock, which is a fictional, very low (L$0.01 is what I've been recommending to those that ask) value to place on the shares. The remainder of the cash you receive is then added to that "Paid-In Capital" line, whose full name is actually "Paid-in capital in excess of par value." When you see the full name, it makes more sense.
Why bother correcting these? Well, if you treat your market capitalization as your equity section, then the accounting equation has to have correspondingly large assets or liabilities to keep in check. This is especially true if you kept a lot of shares back from public holdings. An example would help show this:
Suppose XYZ creates 10,000,000 shares, and sells them for L$1 each. Let's suppose the day afterwards, XYZ stock hits L$3.00 per share. If we use market value on the balance sheet, the company has spontaneously gotten L$20,000,000 richer! But in reality, nothing changed, so this is not an accurate picture.
Instead, the company should record (in my opinion) L$100,000 as common stock, L$9,900,000 as paid-in capital, and $10,000,000 as cash. Then, in subsequent balance sheets, leave the L$100,000 alone, and adjust other lines around it. This will be a better representation of XYZ's true value.
Disclaimer: I'm not an accountant. I'm an actuary. Real accountants, feel free to critique this as needed.
Source: This page of AccountingCoach.com
Sunday, January 20, 2008
Tic Tac (Toe)
If you're wondering about this blog post title, it's meant to represent both the clock accompanying us to January 22, when the new LL policy on inworld gambling will have effect and the tic-tac-toe game that apparently SL financial institutions have been playing with our beloved San Francisco company, in an attempt to get those 3 Xs on a straight row.
We've seen a lot of drama, the run on banks, all kinds of creative minds coming up with more or less viable ideas. One of the best I've seen around is the application inworld of the contractum trinius (which is not really a new idea, but proves that some issues can bite at us over the centuries). So far so good, but I've seen people cheering because the new policy was bypassed this way.
That's not right, for a simple reason. The company controlling the Second Life Grid could ban red hats and whatever, and for every workaround new policies can come up and they can be expanded, in a almost endless armfight.
Let's get back to the contractum trinius. At that time the Catholic Church prohibited usury and that's why our creative ancestors came up with a solution. Now, Linden Lab started from a completely different premise. Some think that they wanted to ease the work for RL banks and their future appearance in full force in our metaverse. Personally, I don't think this is true.
I'll make a long story short: too many frauds related to inworld banking. No need to provide links here, most likely you know of at least one. Those scandals got Linden Lab too much unwanted attention and bad press.
It's about time for the SL financial institutions still operating to do something in order to make things so Linden Lab won't have again to take a stance like the recent one. Over the last days almost everyone has been "flying solo" and with the only intent to keep operating past January 22. Period. At least that's what I gathered from the web. If I have missed something, my apologies. It's not been easy to surf through all the posts, blogs, websites and comments.
This may be the right time for the SLEC (Second Life Exchange Commission) to get its acts together and do something meaningful. This may be the right time for the Second Life Exchanges (as you may know I am the Communication and Public Relations Director for the VSTEX, virtual stock exchange in Second Life) to enforce their rules (which sometimes are unattended by the listed companies, with no consequences) and maybe expand them, so that listed companies are required to meet higher requirements and standards. Here I'm not talking about going "full GAAP", but looking at the companies on the VSTEX exchange, the situation can be disheartening.
Recently I started a simple audit of our companies. The first I started with failed to update the company prospectus for the last month cycle and most important they were reporting substantial profits that had not been distributed as per their dividends policy. Do I think that they did not distribute dividends as promised? No, I think that the numbers on their company prospectus were made up to make the company look good. Maybe those numbers were "hopes about profits", that they just forgot in the company prospectus. Whatever the reason, this is no good.
I can see why the exchanges can be "soft" when enforcing their rules, or why they requirements are pretty loose. They fear to lose ground to their competitors, to lose companies to other exchanges. This tactic is not gonna pay in the long run, 'cause it's just screaming "Linden Lab, do something about me".
We've seen a lot of drama, the run on banks, all kinds of creative minds coming up with more or less viable ideas. One of the best I've seen around is the application inworld of the contractum trinius (which is not really a new idea, but proves that some issues can bite at us over the centuries). So far so good, but I've seen people cheering because the new policy was bypassed this way.
That's not right, for a simple reason. The company controlling the Second Life Grid could ban red hats and whatever, and for every workaround new policies can come up and they can be expanded, in a almost endless armfight.
Let's get back to the contractum trinius. At that time the Catholic Church prohibited usury and that's why our creative ancestors came up with a solution. Now, Linden Lab started from a completely different premise. Some think that they wanted to ease the work for RL banks and their future appearance in full force in our metaverse. Personally, I don't think this is true.
I'll make a long story short: too many frauds related to inworld banking. No need to provide links here, most likely you know of at least one. Those scandals got Linden Lab too much unwanted attention and bad press.
It's about time for the SL financial institutions still operating to do something in order to make things so Linden Lab won't have again to take a stance like the recent one. Over the last days almost everyone has been "flying solo" and with the only intent to keep operating past January 22. Period. At least that's what I gathered from the web. If I have missed something, my apologies. It's not been easy to surf through all the posts, blogs, websites and comments.
This may be the right time for the SLEC (Second Life Exchange Commission) to get its acts together and do something meaningful. This may be the right time for the Second Life Exchanges (as you may know I am the Communication and Public Relations Director for the VSTEX, virtual stock exchange in Second Life) to enforce their rules (which sometimes are unattended by the listed companies, with no consequences) and maybe expand them, so that listed companies are required to meet higher requirements and standards. Here I'm not talking about going "full GAAP", but looking at the companies on the VSTEX exchange, the situation can be disheartening.
Recently I started a simple audit of our companies. The first I started with failed to update the company prospectus for the last month cycle and most important they were reporting substantial profits that had not been distributed as per their dividends policy. Do I think that they did not distribute dividends as promised? No, I think that the numbers on their company prospectus were made up to make the company look good. Maybe those numbers were "hopes about profits", that they just forgot in the company prospectus. Whatever the reason, this is no good.
I can see why the exchanges can be "soft" when enforcing their rules, or why they requirements are pretty loose. They fear to lose ground to their competitors, to lose companies to other exchanges. This tactic is not gonna pay in the long run, 'cause it's just screaming "Linden Lab, do something about me".
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Thursday, January 17, 2008
Is Interest the Devil?
First, go take a look over the 1/15/2008 post in this thread.
Now, several times in that post, Linden Labs appears to take a very anti-interest stance. This is quite curious to me. Interest is usually something considered fairly tame. Precise, but tame.
I happen to be an interest ninja. Not a ninja master, perhaps, but I've done some pretty hard material dealing with interest. I can confirm for you all, after nearly wearing out the decimal point button on my calculator, that interest is not evil.
I think Linden Labs is banking on the idea that the market will not exist if it doesn't have a way to pay itself. That's the only idea I can come up with for a reason to specifically target interest. The line of reasoning must be that if you take away the payout, the money inflow will shrivel up as well.
The question on many people's minds, including my friend Maelstrom, is how much money inflow is leaving SL now. The financial markets brought a lot of cash flow to Second Life, but quantifying that will not be easy. These graphs don't look pretty, though - especially the one about USD spent in Second Life. It's a pretty sharp decline after the gambling ban, and I doubt the banking ban will make things look any prettier when the newest statistics come out.
I don't think Linden Labs will let Second Life die so easily, however. Should incentives be necessary, however, I'll bet LL has a few tricks to play. What I'm wondering is if one of those tricks will be to loosen the Linden Dollar against the USD, and therefore if now would be an opportune time to cash out whatever Lindens can be spared. Thoughts?
Whatever the case, Linden Labs needs to learn a lesson that economists learned centuries ago: markets will not be thwarted. If someone wants to have interest on a loan, they'll have interest on a loan. They might call it something different, or set it up to be sneaky, but it'll happen. Heck, I still get invites to poker tables (I always turn them down, of course). If there are willing buyers (borrowers) and sellers (lenders), the market will find a way to carry on business as it sees fit, no matter how much wrangling it has to do to get there.
Now, several times in that post, Linden Labs appears to take a very anti-interest stance. This is quite curious to me. Interest is usually something considered fairly tame. Precise, but tame.
I happen to be an interest ninja. Not a ninja master, perhaps, but I've done some pretty hard material dealing with interest. I can confirm for you all, after nearly wearing out the decimal point button on my calculator, that interest is not evil.
I think Linden Labs is banking on the idea that the market will not exist if it doesn't have a way to pay itself. That's the only idea I can come up with for a reason to specifically target interest. The line of reasoning must be that if you take away the payout, the money inflow will shrivel up as well.
The question on many people's minds, including my friend Maelstrom, is how much money inflow is leaving SL now. The financial markets brought a lot of cash flow to Second Life, but quantifying that will not be easy. These graphs don't look pretty, though - especially the one about USD spent in Second Life. It's a pretty sharp decline after the gambling ban, and I doubt the banking ban will make things look any prettier when the newest statistics come out.
I don't think Linden Labs will let Second Life die so easily, however. Should incentives be necessary, however, I'll bet LL has a few tricks to play. What I'm wondering is if one of those tricks will be to loosen the Linden Dollar against the USD, and therefore if now would be an opportune time to cash out whatever Lindens can be spared. Thoughts?
Whatever the case, Linden Labs needs to learn a lesson that economists learned centuries ago: markets will not be thwarted. If someone wants to have interest on a loan, they'll have interest on a loan. They might call it something different, or set it up to be sneaky, but it'll happen. Heck, I still get invites to poker tables (I always turn them down, of course). If there are willing buyers (borrowers) and sellers (lenders), the market will find a way to carry on business as it sees fit, no matter how much wrangling it has to do to get there.
Saturday, January 12, 2008
And, He's Back
First, let me apologize to Guardian, the other bloggers, and the readers for not having posted lately. Quite honestly, I have no excuse except neglect due to other priorities.
Life has been a little hectic lately. After a couple months of retreat, I have decided to go back to work full-time. Job-hunting is the one thing I truly hate doing.
I always feel like I am being extremely "fake" in the letters of interest I send to potential employers. I always get so sick to my stomach writing my resumé, as I am forced to write flowery descriptions of past jobs that in all honesty I have truly hated.
Then... scheduling interviews. I actually do not drive anymore (long crappy story), so I rely on either public transportation (which is really BAD where I live) or friends/family to get me from Point A to Point B.
I've been dealing with all of it, though... quite nicely. I am almost 100% certain I will be back to the grind stone by the first of February.
Not sure why I went into all of that, LOL, but it somehow ended up here and frankly I am too tired at this point to edit it.
Perhaps, though, because of my hatred for job hunting... when I found out about the Linden Lab banking ban, I glued myself to the computer screen once again... to help out, to write, to just generally "observe" as this latest and greatest financial drama unfolded.
The day after the announcement, I logged in to see what I could do, and ended up helping at JT Financial. While we had a few angry customers, all in all everyone was very supportive, primarily upset at Linden Lab....... but mostly frustrated with the situation.
As I have read the policy, it would appear that banking as we know it is dead. With the cessation of interest payments, there will be virtually no reason to set up or continue shop with any form of banking script as we know it today.
Now, that being said... the existing banks out there have an opportunity. If they truly have the liquidity that most of them claim, they will be able to make investments into retooling their businesses. Shopping portals, financial service providers, payment services... all are fantastic possibilities with the right marketing and the right transitions. Customers may still be unable to access all of their funds in the short term, but at least the bank owner would be making a clear effort for the continuation of business.
I don't understand how some people, including me in the past couple days, have blown things so out of proportion through over-analysis and just "freaking out" in general.
I can only say that some of banks' (and customers') actions in the midst of this crisis are confusing. Some are totally ignoring it, some are overreacting to it, and some are clearly overthinking their forward path. A few of the ideas I have heard passed around about how to continue operations are incredibly ridiculous, unrealistic, or unworkable.
I truly applaud people who are trying their hardest and "thinking big" but sometimes it just helps to take a day off, watch television, or go swimming... to get a grip on reality and take control of your thoughts.
There are other banks that I have seen who are truly responding to the matter calmly, to the best of their ability. They're telling the truth to their customers and doing what they can to take care of a bad situation.
The one thing I love about almost every single bank in SL is this... every week for the past six months AT LEAST, it seemed like a different bank owner was name-dropping the Lindens in some form or another. By their own accounts, every single bank owner in SL was a friend of Linden Lab. "Bob Linden told us we could do this" or "We've been working with our contact at Linden Lab."
I find it curious that all of the second-cousin and blood-brother Lindens just kicked the floor out from underneath the people that they seemed to talk to the most... virtual bankers.
In any event, I think that Second Life will survive this latest blow. I think we'll see the successful bankers go on to become successful in other areas of business, and I think in the end everyone will agree that in-world banking has significantly contributed to the history of our virtual world.
For now, like you, I sit back and wait... ;)
In any event, that was my quick update for now... quite broad and dull, but the only thing I could possibly come up with after writing so much at SL Reports the past couple days.
On that note, as well... I should mention that I am uncertain how much I will be around the next couple days. I will try, at minimum, to keep track of the latest SL News to stay up to speed with things... but will probably be somewhat silent barring the appearance of something else interesting at the official Second Life blog.
Xavier Mohr
Life has been a little hectic lately. After a couple months of retreat, I have decided to go back to work full-time. Job-hunting is the one thing I truly hate doing.
I always feel like I am being extremely "fake" in the letters of interest I send to potential employers. I always get so sick to my stomach writing my resumé, as I am forced to write flowery descriptions of past jobs that in all honesty I have truly hated.
Then... scheduling interviews. I actually do not drive anymore (long crappy story), so I rely on either public transportation (which is really BAD where I live) or friends/family to get me from Point A to Point B.
I've been dealing with all of it, though... quite nicely. I am almost 100% certain I will be back to the grind stone by the first of February.
Not sure why I went into all of that, LOL, but it somehow ended up here and frankly I am too tired at this point to edit it.
Perhaps, though, because of my hatred for job hunting... when I found out about the Linden Lab banking ban, I glued myself to the computer screen once again... to help out, to write, to just generally "observe" as this latest and greatest financial drama unfolded.
The day after the announcement, I logged in to see what I could do, and ended up helping at JT Financial. While we had a few angry customers, all in all everyone was very supportive, primarily upset at Linden Lab....... but mostly frustrated with the situation.
As I have read the policy, it would appear that banking as we know it is dead. With the cessation of interest payments, there will be virtually no reason to set up or continue shop with any form of banking script as we know it today.
Now, that being said... the existing banks out there have an opportunity. If they truly have the liquidity that most of them claim, they will be able to make investments into retooling their businesses. Shopping portals, financial service providers, payment services... all are fantastic possibilities with the right marketing and the right transitions. Customers may still be unable to access all of their funds in the short term, but at least the bank owner would be making a clear effort for the continuation of business.
I don't understand how some people, including me in the past couple days, have blown things so out of proportion through over-analysis and just "freaking out" in general.
I can only say that some of banks' (and customers') actions in the midst of this crisis are confusing. Some are totally ignoring it, some are overreacting to it, and some are clearly overthinking their forward path. A few of the ideas I have heard passed around about how to continue operations are incredibly ridiculous, unrealistic, or unworkable.
I truly applaud people who are trying their hardest and "thinking big" but sometimes it just helps to take a day off, watch television, or go swimming... to get a grip on reality and take control of your thoughts.
There are other banks that I have seen who are truly responding to the matter calmly, to the best of their ability. They're telling the truth to their customers and doing what they can to take care of a bad situation.
The one thing I love about almost every single bank in SL is this... every week for the past six months AT LEAST, it seemed like a different bank owner was name-dropping the Lindens in some form or another. By their own accounts, every single bank owner in SL was a friend of Linden Lab. "Bob Linden told us we could do this" or "We've been working with our contact at Linden Lab."
I find it curious that all of the second-cousin and blood-brother Lindens just kicked the floor out from underneath the people that they seemed to talk to the most... virtual bankers.
In any event, I think that Second Life will survive this latest blow. I think we'll see the successful bankers go on to become successful in other areas of business, and I think in the end everyone will agree that in-world banking has significantly contributed to the history of our virtual world.
For now, like you, I sit back and wait... ;)
In any event, that was my quick update for now... quite broad and dull, but the only thing I could possibly come up with after writing so much at SL Reports the past couple days.
On that note, as well... I should mention that I am uncertain how much I will be around the next couple days. I will try, at minimum, to keep track of the latest SL News to stay up to speed with things... but will probably be somewhat silent barring the appearance of something else interesting at the official Second Life blog.
Xavier Mohr
Banter on the Banking Ban
It's been a rough few days for the Second Life financial markets. Linden Labs announced that banking, at least in the guaranteed interest form, is illegal in Second Life. The resounding response from my SL circle of contacts has been "What about stock markets?" to which no answer has been readily given. The supposition is that the stock markets will be kosher with Linden Labs, but this has yet to be confirmed through official, exact, announcement.
There have been many comments trying to reassure investors to not panic, but I can't really blame them for panicking. If the FDIC suddenly said my bank was no longer legal, I think I'd go drive up to the local branch and withdraw some money. I use the FDIC as an example because Linden Labs is the closest thing to a true insurance corporation (apologies to The Rock) that your Joe Average Investor has in Second Life. Take that last safety net away (not that there was much of one to begin with, but they did help out LLBT), and you have nothing. Panic is a natural reaction.
The expected outcomes came quickly: stock price crashes, insolvency of banks, outrage, denial, etc. However, now we must look ahead. Owners must reassure their investors or liquidate and distribute final payments. Exchanges must find some way to remain compliant, although I feel this action by Linden Labs was a warning shot for the stock exchanges. Cry foul all you want, I think the day is coming where stock exchanges will be no more for one reason or another. I just don't know when that day is.
So what is a financier to do now? I see a few options:
Until next time,
GM
There have been many comments trying to reassure investors to not panic, but I can't really blame them for panicking. If the FDIC suddenly said my bank was no longer legal, I think I'd go drive up to the local branch and withdraw some money. I use the FDIC as an example because Linden Labs is the closest thing to a true insurance corporation (apologies to The Rock) that your Joe Average Investor has in Second Life. Take that last safety net away (not that there was much of one to begin with, but they did help out LLBT), and you have nothing. Panic is a natural reaction.
The expected outcomes came quickly: stock price crashes, insolvency of banks, outrage, denial, etc. However, now we must look ahead. Owners must reassure their investors or liquidate and distribute final payments. Exchanges must find some way to remain compliant, although I feel this action by Linden Labs was a warning shot for the stock exchanges. Cry foul all you want, I think the day is coming where stock exchanges will be no more for one reason or another. I just don't know when that day is.
So what is a financier to do now? I see a few options:
- Go private: Instead of being able to invest through an ATM, all transactions would need to take place avatar-to-avatar. This would also allow for some extra legal scrutiny, like First Life promissory notes by peer-to-peer lending sites.
- Eliminate the Lindens: Keep things exactly as they are, but run them in First Life currencies through PayPal. I personally don't like this idea because it screams "regulate me!"
- Survival of the Fittest: Try to satisfy the Lindens, law enforcement, stockholders, and make a profit good enough to justify the massive amount of time put in to do it. Good luck.
- Group Mechanics: Could a public corporation in Second Life be run through the mechanics of a Second Life group? I think that would have an easier time being approved than an ATM-based exchange.
- A New Model: You fill in the blank here. The next generation of Second Life money attractors. First it was gambling, now it is stock markets. What's next? I think there may be some room in skill-based player games, for example.
Until next time,
GM
Thursday, January 10, 2008
Apologies
My apologies for not posting a prompter article about the banking ban here. I have a good friend who was taken to the hospital recently, and so that has taken up most of my writing time. Please keep her in your thoughts/prayers.
Hopefully I can get some analysis out this weekend.
Remember, RL > SL.
GM
Hopefully I can get some analysis out this weekend.
Remember, RL > SL.
GM
Tuesday, January 8, 2008
The Fall of Banks in Second Life
If you haven't read it yet - go read this post from the LL official blog.
Initial reactions, to be updated later:
Update: Reports are coming in of the Linden dollar falling in price. Can't confirm it right now.
Update: Lots of people at JTF complaining. Please don't panic, everyone...unless you don't trust your CEOs
Arbitrage Wise Reaction: LINK
WSE Reaction: LINK
ISE Reaction: LINK
VSTEX Reaction: LINK
Virtually Blind Reaction: LINK
Robert Bloomfield Reaction: LINK
Questions still to be answered:
Initial reactions, to be updated later:
- Expect a market panic and a drop in security prices across the board, whether or not the exchange qualifies as a bank or not.
- Bank panics will abound. Smart banks will take their ATMs offline before they run out of deposits. Dumb ones will not, and will run out of cash as investors panic and withdraw.
- This is the time to see if CEOs are honorable or crooks. Don't expect to get all your money back, but expect to get some - and most of the cash portion.
Update: Reports are coming in of the Linden dollar falling in price. Can't confirm it right now.
Update: Lots of people at JTF complaining. Please don't panic, everyone...unless you don't trust your CEOs
Arbitrage Wise Reaction: LINK
WSE Reaction: LINK
ISE Reaction: LINK
VSTEX Reaction: LINK
Virtually Blind Reaction: LINK
Robert Bloomfield Reaction: LINK
Questions still to be answered:
- Are exchanges paying no interest exempted from this ban?
- If exchanges are permitted, are "bonds" now banned, or are they also treated as equity?
- Which companies will honor (as best they are able) their depositors and/or shareholders?
Monday, January 7, 2008
BNT: An Example in Expectations
Over on AnCapEx, Brautigan & Tuck holdings has published their quarterly (ok, four-month) financial statements. To quote the announcement,
In my economics classes, we learned about some of the common market forces which affect demand curves, such as income, tastes and preferences, price of compliments/substitutes, and (most mysteriously to me) expectations.
In my finance classes, we learned about why investors choose to invest in a given security or project. We learned that investors prefer more money to less money, money sooner to money later, and less risk to more risk. The interplay of these preferences creates the wonderful stock charts we all know and love from First Life and Second Life.
I think that within these simple concepts lies the heart of the situation above. Despite having assets at three times the share price, investors simply don't expect to get anything from them. To be honest, BNT hasn't given them much to hope for: to my recollection, there has only been one dividend and no buybacks (although Intlibber did eliminate a large swath of his own holdings, this had little effect on the market price since it didn't affect the floating shares) to speak of. The most faithful shareholders of BNT, those that purchased the stock at its IPO on the World Stock Exchange, have lost 76% on their L$1.00 per share investment.
So is it any wonder that the price flutters with the whims of the day traders instead of reaching its NAV? With no history of dividends, buybacks, and little hope of actually getting L$0.72 per share for your BNT, the market seems perfectly justified (to me) in withholding its Lindens from purchasing anything but a token amount of BNT, and so it seems to have progressed.
There has been some comparison of BNT to Microsoft (NYSE:MSFT) in the past. I can't link to it because I don't think it has been explicitly written down before, but trust me on this one. However, the differences are beginning to show between the technological juggernaut and BNT holdings:
...while our profits are nothing to boast about, we were able to post nearly 27% growth in NAV despite a downturn in real estate asset values. NAV is now L$ 0.76, above the L$ 0.60 value BNT was at after we restructured our shares and eliminated 67 million of the CEOs personal shares in the largest voluntary elimination of personal wealth in SL history.Well, this is an interesting situation. As of this writing, the price of a share of BNT stock is L$0.24, and it has been around that level for some time. If the NAV of this stock is L$0.72 as claimed, why aren't market forces pushing it up to that level?
The growth in our NAV is confirmation that BNT's long term strategy of no dividends, focusing on growth, has been the right one. Despite an in-world depression, banking crash, and downturn in the capital markets as well as real estate markets, BNT continues to grow, and by growing is returning value to the shareholder the old fashioned way. This share value is not short term gimmickry like those CEOs who fake up big dividends that mostly winds up in their own pockets. This is real value in a real company.
In my economics classes, we learned about some of the common market forces which affect demand curves, such as income, tastes and preferences, price of compliments/substitutes, and (most mysteriously to me) expectations.
In my finance classes, we learned about why investors choose to invest in a given security or project. We learned that investors prefer more money to less money, money sooner to money later, and less risk to more risk. The interplay of these preferences creates the wonderful stock charts we all know and love from First Life and Second Life.
I think that within these simple concepts lies the heart of the situation above. Despite having assets at three times the share price, investors simply don't expect to get anything from them. To be honest, BNT hasn't given them much to hope for: to my recollection, there has only been one dividend and no buybacks (although Intlibber did eliminate a large swath of his own holdings, this had little effect on the market price since it didn't affect the floating shares) to speak of. The most faithful shareholders of BNT, those that purchased the stock at its IPO on the World Stock Exchange, have lost 76% on their L$1.00 per share investment.
So is it any wonder that the price flutters with the whims of the day traders instead of reaching its NAV? With no history of dividends, buybacks, and little hope of actually getting L$0.72 per share for your BNT, the market seems perfectly justified (to me) in withholding its Lindens from purchasing anything but a token amount of BNT, and so it seems to have progressed.
There has been some comparison of BNT to Microsoft (NYSE:MSFT) in the past. I can't link to it because I don't think it has been explicitly written down before, but trust me on this one. However, the differences are beginning to show between the technological juggernaut and BNT holdings:
- Microsoft has split nine (!!!) times in its history. BNT has split zero times.
- MSFT increased its stock price 273% (!!!) in its first year out of IPO. BNT has lost 76% to date (true, it hasn't been out a year yet, but at 3/4 of the way through the year, MSFT was still up about 160%).
- MSFT made no theories or announcements about how people were out to get them in their first year of operations (to my knowledge). BNT has made a few.
Sunday, January 6, 2008
Here We Grow
Although it's a few days into 2008, I'd like to announce my resolution for Second Chaos. I'd like to see this site grow into the multiple-author glory that I have envisioned for it. I'll need good authors (still accepting volunteers!), active and faithful readers, and a constant flow of new ideas to make that happen, but I believe it can be done. I'd like to see nearly-daily updates and 500 unique pageviews per week by the end of 2008. Check out how I'm doing here.
Want to help me out? Here are some things I could use, if you felt like giving SC a late present this season:
Want to help me out? Here are some things I could use, if you felt like giving SC a late present this season:
- Links: Technorati authority is built on links, as is search engine page returns. I'll be happy to return the favor in relevant posts.
- Comments and Feedback: Nothing makes for interesting discussion like reader opinions. Plus, it helps us here at SC know where to guide our articles.
- Ideas and Requests: I've already gotten a few, but I don't think the other authors have yet, and I'd love to have more. Keep 'em comin' - we'll tackle whatever you like.
- Referrals: Like what you see? Tell people to stop by.
Street Name
I would like to throw a new idea about the representation of shareholders in the SL Capital Markets out there. Ironically, this idea is currently in place and my suggestion is to remove some of it (how's that for backwards!). The idea is registered shareholders, and my suggestion is to add shares in street name to the mixture.
First, why? There has been longstanding debate between (long-term) investors and (short-term) day traders in the SL Capital Markets. I think both sides have their merits (and profitability) but its clear that the interests of the two parties are entirely different. A day trader probably isn't interested in long-term matters of the corporation, whereas an investor is very interested in those issues.
So what does adding street name do? If investors could voluntarily register their shares with a corporation, then that corporation would know it needs to pay attention to them because they're interested for the long haul. If the shares are in street name, then the company can be less concerned (not unconcerned, but less so) with these shares, because they will change hands frequently. As to voting, I think the street name share should abstain from votes, since that is basically why they are street name shares.
There should also be some (nominal) fee and some incentive to registering shares: the fee to show you're serious, the incentive to reap the benefits thereof. Perhaps a fee of L$10, but then you have the ability to sell share directly to the company during a buyback, or they refund part of your trading fees if you sell directly to the corporate treasury. Obviously this would require some changes to existing exchange coding, but I think there are benefits to be had as well.
Thoughts?
First, why? There has been longstanding debate between (long-term) investors and (short-term) day traders in the SL Capital Markets. I think both sides have their merits (and profitability) but its clear that the interests of the two parties are entirely different. A day trader probably isn't interested in long-term matters of the corporation, whereas an investor is very interested in those issues.
So what does adding street name do? If investors could voluntarily register their shares with a corporation, then that corporation would know it needs to pay attention to them because they're interested for the long haul. If the shares are in street name, then the company can be less concerned (not unconcerned, but less so) with these shares, because they will change hands frequently. As to voting, I think the street name share should abstain from votes, since that is basically why they are street name shares.
There should also be some (nominal) fee and some incentive to registering shares: the fee to show you're serious, the incentive to reap the benefits thereof. Perhaps a fee of L$10, but then you have the ability to sell share directly to the company during a buyback, or they refund part of your trading fees if you sell directly to the corporate treasury. Obviously this would require some changes to existing exchange coding, but I think there are benefits to be had as well.
Thoughts?
Thursday, January 3, 2008
Lessons in FM: Part VI - Rate of Return
Note: This is a continuation of the series Lessons in Financial Mathematics. Reading previous posts about this topic may aid in your understanding of this article. Note that this article is a direct continuation of Part V, and so reading that one would probably be a good idea.
Last week, I discussed my pseudo-accounting method of keeping track of the (Linden) dollar value of your gains and losses in an SL capital market. Now we turn to the topic of finding the rate of return earned over that month. I'll be using the same example as I came up with last time.
To be mathematically precise, the rate of return can become a very ugly equation very quickly. The reason is because you have to take into account all the cash flows in and out of your account at the times that they were taken. Basically, you're going to know your cash flows at time t (Ct), as well as the initial and final balances, and you have to solve something like this for i (and this is only for regular investment intervals!):
This gets really ugly really fast. Normally even financial calculators wind up using a numerical method like Newton's Method to figure this one out. (You can tell this is a hard calculation on a financial calculator because often the calculator will pause for a few seconds before spitting out the answer.)
It is time to introduce you all to the XIRR function. IRR stands for "internal rate of return," and is used to calculate that ugly polynomial I referred to up there. XIRR takes the form XIRR(values,dates,[guess]). "Values" are the cash flows (positive for coming in, negative for going out), "dates" are the dates that correspond to the cash flows, and "guess" is where the iterative method starts from (just use .10 or leave it blank). XIRR returns the decimal of your return. For example, a 15% return is expressed as .15, not 15% or 1.15.
However, XIRR is based on a 365 day period, and we were dealing with a one-month period. That means that it isn't discounting quite correctly. Therefore, I suggest adjusting (mathematically: transforming) the date values so that they correspond to a year-long period, rather than a month. To do this, we'll use the YEARFRAC function, which takes a start date and end date and produces the fraction of a (365-day) year that occurs between those two dates. The syntax is YEARFRAC(start_date,end_date). To complete the transformation we want to take that fraction of the year between our start date and our (1-month) dates, multiply that by 365 (number of days different), multiply that by 12 (to stretch it to 1 year instead of 1 month), and then add it to our original starting date (to transform it). The formula looks like this:
YEARFRAC(start_date,end_date) * 12 * 365 + start_date = transformed_date
We know it works because our last day of the month transforms to the day before 1 year after the first day. We started at 12/1/2007, and the last date is 11/30/2008. We win.
The only other adjustment is a small annoyance with XIRR, and that is that our cash flows need to have their signs reversed. Also, one of the balances (preferably the beginning one) needs to be the opposing sign of the other one. I've made the beginning one negative.
XIRR turns out negative for our example because we've only included the realized gains. To get a more complete picture, I've made another couple columns with L$1,500 in unrealized gains included in the ending balance (completely arbitrary, as all unrealized gains calculations are). This results in a much nicer-looking positive rate of return.
You can find the completed spreadsheet here. It's the same as last time, but with a new tab marked "Rate of Return" where you can find these calculations. Once again, I'll happily pass out free copies of the spreadsheet so that you all can read the formulas if you like. Just email me at guardian.market@gmail.com.
I think that takes care of my first reader request. I love to answer questions and help people understand topics, so keep 'em coming. Anyone else want to provide a challenge?
Last week, I discussed my pseudo-accounting method of keeping track of the (Linden) dollar value of your gains and losses in an SL capital market. Now we turn to the topic of finding the rate of return earned over that month. I'll be using the same example as I came up with last time.
To be mathematically precise, the rate of return can become a very ugly equation very quickly. The reason is because you have to take into account all the cash flows in and out of your account at the times that they were taken. Basically, you're going to know your cash flows at time t (Ct), as well as the initial and final balances, and you have to solve something like this for i (and this is only for regular investment intervals!):
Final = Initial * (1+i)t + C1 * (1+i)(n-1)/t - C2 * (1+i)(n-2)/t + ... + Cn-1 * (1+i)1/t
This gets really ugly really fast. Normally even financial calculators wind up using a numerical method like Newton's Method to figure this one out. (You can tell this is a hard calculation on a financial calculator because often the calculator will pause for a few seconds before spitting out the answer.)
That being said, there are several things which can make this calculation easier:
- Having no cash flows. That chops that ugly polynomial down to a simple exponential problem rather quickly.
- Assume all cash flows occur at a certain time (such as at the middle of the month). This, combined with a simple interest assumption, results in a very compact formula which can be very close to the real rate of return, or very far off (if you're unlucky).
- Put your cash flows at fixed intervals. This makes it more like an annuity calculation, discussed in Part II of my Lessons in FM.
- Harness the power of Excel.
It is time to introduce you all to the XIRR function. IRR stands for "internal rate of return," and is used to calculate that ugly polynomial I referred to up there. XIRR takes the form XIRR(values,dates,[guess]). "Values" are the cash flows (positive for coming in, negative for going out), "dates" are the dates that correspond to the cash flows, and "guess" is where the iterative method starts from (just use .10 or leave it blank). XIRR returns the decimal of your return. For example, a 15% return is expressed as .15, not 15% or 1.15.
However, XIRR is based on a 365 day period, and we were dealing with a one-month period. That means that it isn't discounting quite correctly. Therefore, I suggest adjusting (mathematically: transforming) the date values so that they correspond to a year-long period, rather than a month. To do this, we'll use the YEARFRAC function, which takes a start date and end date and produces the fraction of a (365-day) year that occurs between those two dates. The syntax is YEARFRAC(start_date,end_date). To complete the transformation we want to take that fraction of the year between our start date and our (1-month) dates, multiply that by 365 (number of days different), multiply that by 12 (to stretch it to 1 year instead of 1 month), and then add it to our original starting date (to transform it). The formula looks like this:
YEARFRAC(start_date,end_date) * 12 * 365 + start_date = transformed_date
We know it works because our last day of the month transforms to the day before 1 year after the first day. We started at 12/1/2007, and the last date is 11/30/2008. We win.
The only other adjustment is a small annoyance with XIRR, and that is that our cash flows need to have their signs reversed. Also, one of the balances (preferably the beginning one) needs to be the opposing sign of the other one. I've made the beginning one negative.
XIRR turns out negative for our example because we've only included the realized gains. To get a more complete picture, I've made another couple columns with L$1,500 in unrealized gains included in the ending balance (completely arbitrary, as all unrealized gains calculations are). This results in a much nicer-looking positive rate of return.
You can find the completed spreadsheet here. It's the same as last time, but with a new tab marked "Rate of Return" where you can find these calculations. Once again, I'll happily pass out free copies of the spreadsheet so that you all can read the formulas if you like. Just email me at guardian.market@gmail.com.
I think that takes care of my first reader request. I love to answer questions and help people understand topics, so keep 'em coming. Anyone else want to provide a challenge?
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