Lessons in FM: Part V - Gains and Losses

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, but may not be necessary for this one. Also note that this topic is by request.

I got an email from a reader asking me to shed some light on the mystery of how to calculate your portfolio return from a mess of buys and sells that is done over the course of a period of time (the reader suggested one month). To be honest, this is not an easy problem. Even Maelstrom Baphomet has (more or less) admitted defeat on this issue.

Please take note that the tracking of financial position is a question perhaps better posed to accountants, but I'm going to show you how I would do it. I'm going to use some techniques accountants will (hopefully) recognize, but without some rigidity they demand. I will also be publishing another Lesson in FM which will be a continuation of this topic, but dealing with how to find the rate of return for your portfolio over a given time period.

I'm first going to tackle the problem of finding the (Linden) dollar value of your return and then address the problem of calculating the rate of return for the given time period. Throughout this article, I will be using one month as the time period in question.

For those of you wanting to track your gains and losses precisely, I'm going to need a few things from all of you who want to know your gains and losses.

• First, keep track of every transaction you make, including date, ticker, share amount, and share price on Excel. A few of the exchanges also allow you to download this information. I'll be starting with a CapEx download style and building from there.
• Secondly, make sure you have some way of notating which is a buy and a sell. I'm going to use separate columns for each type (debits and credits, anyone?).
• Lastly, if you can spare a few seconds, having some notes in your spreadsheet will help you out greatly when you look over it later.

It is now is a good time to talk about realized vs. unrealized gains. By now, I'm guessing most of you know by now that the value your portfolio shows at most exchanges is a fictitious number. The only way to achieve such a value would be to sell every one of your shares at the last traded price, plus the commission. While this is normally not possible or practical, even trying to get an idea of the liquidation value may be impossible, as most exchanges show only the top bid/ask prices for each security, and you may have more shares than that to sell (liquidate). Thus, if you can't tell what the whole market's prices are, you have no way of knowing how many Linden dollars you could get for your shares.

Because of this, unrealized gains can be nearly impossible to track. I'm going to give you a way to track the realized gains/losses (things that either directly cost you cash or gave you cash) and let you estimate the unrealized gains/losses as you so choose. To find the total profit/loss, then, just add the two. For the rate of return calculation, you will need to estimate your unrealized gains/losses, but for the realized portion it is not necessary.

To compute realized gains/losses, you need to know how much you have paid for a security. At first, this may seem like a nightmare, as you may have purchased different amounts at different prices, making some sort of odd average seem very difficult. However, if we just use some Excel commands, we can easily compute the total number of shares held along with how much was paid for them.

Here is a spreadsheet with some transactions (all made-up) for the month of December. Apologies to any companies whose tickers I used inadvertently. I've only got 8 transactions in there to keep life simple, so that readers can check my formulas without too much trouble if need be. I've also listed the beginning and ending balances for the month. The bolded portion of the worksheet represents the part that comes straight off of the download from CapEx - everything else I've added. (Note that because the CapEx format lists cash flows from sells as negative and buys as positive, you must subtract the sum of those cash flows rather than adding them to your beginning balance.)

You'll have to do some scrolling to see the full worksheet. What I've done is separate out the buys and the sells so that I can add them more easily later. I've put buys on the left and sells on the right, and done it for both the cash value traded, as well as the number of shares traded. IF() statements are very useful for doing this quickly.

In Excel, there is a very nice command called SUMIF, which takes the following arguments: SUMIF(lookup_range,condition,sum_range). "lookup_range" refers to the range where the condition is located. "sum_range" is then the corresponding range to sum if the condition is met. For my purposes, the ticker symbol is a nice condition to sum on. Using SUMIF, you get the small chart I have at the bottom-right.

I want to go over the formula I have in the "realized gains/(losses)" cell, however. It reads:

ROUND(Cash_In - Cash_Out * (Shares_Sold / Shares_Bought), 2)

What I'm doing is averaging what your price paid for the stock was, and what you sold it for. All of this is on average. Cash_In is fine as is - you get 100% (less commission) of your sale price as a gain. The Cash_Out, on the other hand, may have been for more shares than you sold. Say you wanted to reduce your holdings in a company. You may still hang on to some shares, but you may have realized a profit on the ones that you did sell. Because of this, I'm multiplying the Cash_Out by the percentage of your shares that you sold. In the line detailing ABC, for example, the investor sold 80% of the holdings, so only 80% of the Cash_Out is applied to the Cash_In when computing these gains/losses.

The final cell calculates a basis for the remaining shares, although not complete in the strict, IRS sense of the word. However, it will provide a nice way for you to track shares carried over from month-to-month using that as your price.

In my happy example, the investor has realized L$103.79 in gains.

A few final comments:

1. I am not an accountant. Any accountants out there who would like to critique my methods, please do so.
   
2. I realize you all cannot view the formulas and that may be less than helpful if you don't have much experience with Excel. If you would like an Excel copy of this spreadsheet, email me at guardian.market@gmail.com.
3. My First Life job requires me to be pretty disciplined at Excel, but nevertheless I do make mistakes. (Every once in awhile, Excel makes mistakes, too!) Always check at least a few parts of your calculations by hand or calculator when making spreadsheets.

Happy tracking!

Merry Christmas

May the season be filled with joy for you and yours! Remember those who you hold dear, and give them what they really want - your presence.

GM

IPO Hesitations

Sometimes when a new initial public offering (IPO) comes out in the Second Life capital markets, I may read the prospectus and then decide that this company is a worthwhile investment, with a good business plan and solid management. Other times, I have reservations about buying an IPO for various reasons, some of which have become more common and so I thought I would list here. Maybe I'm off-base with my hesitations, or maybe I haven't seen something I should have. Read on, and let me know what you think of my reasons, and maybe add some of your own.

1. Big IPO with a Long Duration

In short, if I think this IPO will take a long time coming to the trading room, I won't buy it. At least not until it's much closer to selling out, and probably not even then. (A good current example of this is the ACE IPO on the Ancapistan Capital Exchange. 7,000,000 shares, with the majority of shares owned by the massive BNT? I think that will take awhile to sell out.)

The reason is because when an IPO takes a long time to sell out, investors who bought in early get nervous. Maybe First Life situations create a demand for cash from Second Life, maybe they find better investments they wish to try, but whatever happens, they suddenly have an urge to trade their shares for cash. This often causes long-standing IPOs who move to the trading room to drop below their IPO price almost instantly. Therefore, the prudent investor looking to maximize returns will wait until that price drops and buy at 90%, 80%, 50% of the IPO price.

2. Existing Businesses Suddenly Becoming Generous

"We've been in Second Life for 3 years and now we want to share the wealth!" Uh-huh. Sure you do. When I read this I think to myself that this is either a business in serious trouble or an outright "poof" scam (the CEO goes "poof" with all the money). Neither is good for my ROI, so I'll stay away from these.

3. Banks

When I see a bank IPO, a huge, flying, shimmering red flag goes up in my mind. Unless there is some major project requiring capital expansion, this screams "I can't pay my interest" to me. That's not my type of investment.

There has been some discussion as to whether or not JTF will IPO on the SLCapEx forums. Should JTF IPO, I will reduce my cash and stock holdings significantly within JTF in anticipation of its failure. The reason is because I don't think JTF needs money to IPO. They're already huge - why would they need another L$1, 5, 10 million to expand when they have somewhere in the neighborhood of L$80 million on deposit, last I heard? That doesn't make sense, and therefore taking JTF public would be a major sign of insecurity to me. Once again, readers, please comment if you have a different analysis.

4. Multiple Companies under one CEO or Brand

While this could be perfectly legitimate, it also runs the risk of "robbing Peter to pay Paul." This is a criticism I have of the LNL brand, as well as the BNT brand and (basically) it's spin-off, ACE. I would have added the Delicious brand to that list, but they recently combined their tickers into the DDE ticker on the WSE.

I would rather see one conglomeration than two or more separate and distinct companies building into the same brand. For one, bookkeeping costs (or time spent bookkeeping) is likely to be significantly less under one ticker symbol than two or more. Secondly, if the businesses are combined, then divisions doing well can help divisions which need more capital infused into them to succeed.

Also, remember that Jasper Tizzy controlled three tickers at the time of his departure, and it has since been discovered that he used the deposits of the bank (one ticker, AVC I believe) to pay for the land purchases of another (CGI). I am not accusing IntLibber or Lindsay of these dishonest actions, but I simply ask investors to be wary of the possibility and to do their homework when dealing with these companies (which they should be doing anyway).

5. Incompetent Management

If you're really hoping to hold on to this security for a few months (long-term in Second Life), then chat/talk with the CEO before purchasing. Ask them questions. Hard questions. Ask them where the money is going, what it is going to be used for, how much they expect to bring in, low estimates, high estimates, share price targets, "what ifs," etc. If they can't at least attempt to handle your questions, or worse yet blow you off, then run away fast. So long as you ask in a respectful manner, they should respond likewise.

Every company I own I've either contacted the CEO or read enough of their blog to know they're competent. One of my biggest hints that Tao Group Bonds (formerly WSE:TGB) was going to fail was that Chao Mu, the former CEO, became rather frustrated with my questions and started giving sarcastic responses. That was a big red flag to me, and I sold before my money got completely "WTFed."

These are my principal reasons why I do not participate in a new IPO on an exchange. Certainly I have missed some opportunities from my caution, but I feel that prudence is the better part of valor, and I know I've also saved myself some Lindens with these rules of thumb. As always, comments are welcome here or in-world.

Security Regulation in Second Life

Guardian's Note: This was also published at SLReports.net

By Samantha Goldflake and Guardian Market

The transcript of the 12/12/2007 meeting of the Second Life Exchange Commission (SLEC) is not very encouraging. It shows an organization struggling with its own identity, leadership, and purpose in the virtual world, all the while public voices are growing increasingly critical of the abilities of the SLEC, as well as the conflicts of interest which reside with its leadership. Two different schools of thought appear to be forming within the SLEC - one which looks at a system of punishment for companies and markets not compliant with the SLEC's regulation, the other which argues for rewarding the companies and markets which are compliant.

The first idea, that of punishment, is a natural one to strive for. It is, after all, how governmental regulatory bodies operate. If a company does not comply with their rules, they can fine, imprison, or seize assets as justified. However, in Second Life this is simply impractical. Although some systems have been constructed to incorporate this system of punishment into the mixture (such as ACE requiring that its companies who own land use BNT land, so that that asset may be seized if necessary), it simply does not carry the same weight that it does in First Life. The bottom line is that even if you do everything you can to an avatar: take their money, land, inventory, maybe even ban them from Second Life - it simply does not carry as much weight as any one of those actions would in First Life.

The second idea, that of a reward system, also has many examples in First Life. Some examples include Underwriters Laboratories (UL), The American Institute of Certified Public Accountants (AICPA), The American Academy of Actuaries and numerous others all over the world. Each of these organizations has a set of rules and standards by which membership may be granted. In exchange for abiding by these rules and keeping in good standing with the organization, a designation is awarded. For example, the AICPA awards the Certified Public Accountant (CPA) designation, which is widely recognized throughout the United States. The only form of "punishment" which the AICPA can offer is to take away the right to use that designation, and yet this is punishment enough to keep the entire organization membership in line because of how well-respected (and valuable) that designation is.

This idea, the idea of awarding a designation to those who (voluntarily) follow the set standards, is indeed practical within Second Life. What standards, how the designation is awarded, and what the designation looks like is the concern of the marketing department of the organization awarding it. The World Wide Web Consortium (W3), for example, gives links or icons to be placed on well-constructed websites which then link back to the W3 explaining what the designation means and why the website is using it. When visiting a site displaying one of those icons, then, the user knows that the designer has taken the time to make their site compliant with the W3's standards (and this usually indicates a careful and advanced web programmer as well). A similar system could be put in place for the SLEC or other investor protection entity.

The concept of a regulatory body in Second Life is impractical. However, the concept of an organization which publishes well-founded standards, evaluates applications, and awards designation(s) to those who adhere to the standards published is entirely practical within Second Life. Such an organization could earn the trust and respect of investors, as well as gain publicity through publishing said designations. This method of honoring those who abide by their standards, rather than criticizing those who do not adhere to them, could (in time) grow to be an effective method of market regulation, support, and education.

So far so good, but one should always look at the whole picture. The aforementioned theoretical organization should be formed by people with a relevant First Life background, not by self-certified or wannabe public accountants. Also it should be unbiased and not partial. Is this an obvious statement? It sure is, however it's a good thing to recall this concept, as it's a good thing to recall that actual, apparent and even perceived (by the general public) conflicts of interests should be avoided at all costs.

An award is as good as the reputation of the awarding organization. Of course everybody has to start somewhere and public trust isn't earned overnight, so at the beginning the life of an organization dealing with accounting and business standards could be hard. However, by following some guidelines problems should be greatly reduced. The organization:

• must be formed by people with relevant First Life backgrounds and enough SL experience (there are differences between the two)
• must be unbiased and not partial to any SL financial institution
• must keep at any time open communication channels with SL financial institution and the general public
• must pursue at any time consistent, coherent and continued communication about its mission, acts, targets and such
• must strive to earn and keep SL financial institutions and the general public trust
• and, its members must avoid any actual, apparent or perceived conflicts of interests.

That given, then everything is possible. After all, it's a matter of business ethics. An ethical organization will be able to win the hearts of both SL financial institutions and the general public.

The idea of an organization publishing standards and assigning designations to those who adhere to those standards is admirable and achievable. There is a big problem, however: that organization must really be unbiased and independent. It must also earn public trust. In the SL financial world we see pretty much the same faces everywhere. If not those faces, we see their friends. Are there people we can trust to form an unbiased and independent organization? Time will tell if the SLEC will be that organization, or if another must be formed to accomplish that end.

So, you're in the trading room...

Let's say you're the "Oompa Loompa Duffo Inc. SL" CEO. Your virtual company has recently gone public and you had your IPO on a Second Life stock exchange.

You did your homework and you followed the guidelines to the point; your IPO has been an outstanding success or, even if you failed to achieve that, you raised a nice amount of money and now your company has a solid foundation to build up from.

This blog post isn't about what you're gonna do with your money, anyway. This post is about you should deal with investors, present and future.

Working for a virtual stock exchange as I do can be pretty interesting. I see everything the general public can see and a lot of the things "behind the curtains" and in my 4 months (more or less) service for the VSTEX I observed some common trends.

Most CEOs will be very proactive about their IPO, but usually their excitement will tone down once they are in the trading room. It's been a month or more (in the worst cases several months) since the IPO and the company prospectus hasn't changed a word, except for the financial data (eventually). The business plan is still a few lines long and there isn't an in depth risk analysis.

Your last news item on the stock exchange website dates to a month ago, or to several months ago; and let's be honest: your last news weren't that great, short and with abundant exclamation marks.

I believe that one of the issues behind stock prices dropping to ridiculous levels (0.1x L$ per share) is lack of proper and regular communication with the investors and the traders.

You may argue that nor you as a CEO, nor your company, earns anything from people buying and selling your company shares. While that's quite true, that's only the minor part of the picture.

First, would you like the CEO of a "0.1x company?". I certainly would not, as I wouldn't be happy to be the CEO of a company who had a successful IPO and in just a month is trading at values 5, 6 times lower than the original IPO price (can you say "unhappy investors"?).

Second, your share value is part of your company (and sometimes personal) reputation. An healthy share price is perceived as the result of an healthy, well run company. It makes people want to buy your shares and your investors are maybe the first in line to buy your products or services.

Third, being perceived as a "valued company" helps you stand out from the crowd. Gets your name in the news, people look at you. And it's free advertising.

I could go on for miles on this subject, but I think I told you the most important things. When writing, you don't have to be telegraphic (unless you're writing a newsflash or a telegram), but you don't have to flood your readers with words too (unless you're writing a novel or a poem).

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Random Humor

Xavier showed me this hilarious webpage, which I recommend you all spend 10 seconds looking at for your laugh of the day. Enjoy.

Get A First Life

Lessons in FM: Part IV - Equivalent Portfolios

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, but shouldn't be necessary for this one.

The last time I had checked, the Big Six and Big Eight bets had all but disappeared from modern craps tables on the Las Vegas strip. The reason is because no one was betting them. The Big Six and Big Eight bets paid even money (1:1) for a payout, but there was another bet, called "Place Six" or "Place Eight" which paid better odds (7:6) and hit at the exact same time that the Big Six and Big Eight bets did. Because of this, bettors learned that it was smarter to use the place bets rather than the large, Big Six or Big Eight bets on the corners. (To try these out for yourself, you can find a nice craps flash game, no real money used, here.)

The Big Six and Big Eight bets violated a fundamental rule of financial mathematics:

Portfolios with equivalent payouts will have the same price at all points in time.

The concept is simple enough - portfolios of investments that provide the exact amount of reward, in exchange for the exact amount of risk, will sell for the same value. If not, the market will buy the more advantageous one and sell the less advantageous other one until the prices come to equilibrium. Note that once again, this is economic argument and not mathematical proof. However, once mathematicians accept this argument, they get their (very powerful) equals sign back and begin to work their magic.

It's very difficult to frame this article in the context of Second Life finances because many of the tools used to bring this principle into practice don't exist there. Short selling, options, futures, etc. all don't exist in Second Life (yet - I'm still holding out hope), and so these strategies likely will not work there. Instead, then, venture with me into First Life and the world of financial derivatives. First, some quick definitions (with links for better explanations):

Long Buy - This is the stock transaction we're all used to: buying a stock and selling it at a later date.

Short Sell - This is selling a stock you do not own with the promise to pay it back later. You are liable for any dividends, splits, etc. that the stock undergoes while you are shorting it.

Calls - This is an option which gives the holder the right, but not the obligation, to purchase a specified security by a specific time at a specific price, all of which are spelled out in the details of the call contract.

Put - The opposite of a call, this is an option which gives the holder the right, but not the obligation, to sell a specified security by a specific time at a specific price, all of which are spelled out in the details of the put contract.

In the put and call articles of those Wikipedia links above, the authors have provided a graph on which the vertical axis shows the payout (or profit with the dashed line) and the horizontal axis shows the underlying security's price. If you sell the call or put instead of buying it, you simply invert those lines over the horizontal axis to get your new payoff/profit graph. These are shown below the first graphs.

The payoff graph for a long buy is an upward-sloping line (with slope 1). For each unit the underlying security (the stock) goes up, you get another unit of payoff and profit. As I mentioned above, if you happen to short the stock, then the line slopes down (slope = -1) and for each unit the stock goes up, you lose another unit of payoff and profit.

There is also some consideration to be given to interest in this matter. Options take place in the future, and so you have to compensate the investor for giving up their money for a period of time. This is usually done at the risk-free rate.

Out of all these graphs and rates, you can push, pull, bend, and tweak various portfolios to have the exact same payouts, even though on the face they look very different. Some of these portfolios will make even the most seasoned investor's head spin, but because of financial mathematical principles, the price can be easily calculated.

A good example of this is the put-call parity formula. This formula tells how the price of a put, call, the underlying stock, and the interest rate all depend on each other. Given any three of those, you can solve for the fourth.

Let's get an example here. At the time of this writing, the price of 3M Corporation (NYSE:MMM) was $85.93. A January 2009 call for $90 is selling for $8.42, and a January 2009 put at $90 is selling for $9.40. Using the put-call parity formula, we can calculate what the interest rate must be in order for these prices to be in line. From the article (with symbols properly translated):

Call Price + (Strike Price)/(1+i) = Put Price + Asset Price

8.42 + 95/(1 + i) = 9.40 + 85.93

i = 9.3%

Investors in the 3M Corporation believe that they must receive exactly 9.3% interest between now and January 16, 2009 (8.28% annually) in order to make these prices work. Note, however, that the put-call parity formula assumes no transactions costs. Your 9.3% rate of return would be offset by these transactions costs. Still, if you happen to be looking for a decent rate of return (and don't mind making your broker sweat in order to get it), this is something to consider.

Questions? Comments? To me, this is one of the most fascinating concepts in financial mathematics, because it allows you to construct new portfolios, new investments, new ways of moving money around and still have a good idea of what the price should be. It also allows for you to more easily see arbitrage opportunities, and exploit them if they happen to exist.

I have no idea what the next Lesson in FM topic will be. Suggestions, anyone? It doesn't have to be overly complex - if a reader would like me to take a stab at explaining a concept, I'll do my best. Just leave your thoughts in a comment here, and it'll find its way back to me.

How to Make a Stock Index

There are, as I now count, six capital exchanges in Second Life. Yet only two of them (the ISE and VSTEX) have indices to measure that exchanges performance. There is also a service which provides indices and stock graphs, SL Quotes, available for public viewing. However, none of these aforementioned indices detail their methodology for how they produce this index (nor have I tried to replicate it). I thought, therefore, that it might be illustrative for readers to think about how a stock index is constructed and administered.

First, let's think about what a stock index should and should not do. We DO want it to

• Incorporate many securities (conceivably all of them from a given exchange)
  
• Adjust for new entrants and exits from the market, splits, and (probably) dividends
  
• Reflect market performance

I think it would be safe to say that we DO NOT want it to

• Be less volatile the least volatile stock, or more than the most volatile
  
• Spike or decline sharply just because of an entrance or exit by a security, split or dividend

With those constraints in mind, I'd like to introduce the concept of market capitalization (MCAP).

Definition: MCAP = (Total outstanding shares) * (Price per share)

For Second Life, I'm going to alter that definition slightly because of some companies who have a LARGE volume of outstanding shares, but only a small portion of which is actually being traded, or in float:

Definition: SLMCAP = (Total shares in float) * (Price per share)

A market capitalization gives you an idea of how large a company is on the stock market. A company with 1,000 shares trading at L$100 is smaller than a company with 1,000,000 shares trading at L$0.50, even though the L$100 stock price is higher. This is a very important concept when constructing an index, because it demonstrates that you should not form an index by simply constructing a portfolio of one share of each stock, because larger prices can give disproportionately higher representation to smaller companies. (Such an index, by the way, is called a price-weighted index.)

You can make price-weighted indices that function well (the link I used cites the Dow Jones Industrial Average as one), but I think it gives, or could give, disproportionate weight to companies that aren't actually affecting the market that much.

In contrast to this, a market-weighted index will weight each company by its market capitalization, thus giving the larger companies more say in how much the index swings.

So how does one actually construct such an index? Well, one way to do it would simply be to add up all the SLMCAPs and leave it at that. Mathematically:

Index = SLMCAP₁ + SLMCAP₂ + ... + SLMCAP_n

However, this number is likely to be quite large and cumbersome, so instead, you need to divide it by some divisor D.

Index = (SLMCAP₁ + SLMCAP₂ + ... + SLMCAP_n)/D

This divisor is very important, because it also allows the flexibility to adjust for buybacks, new entrants, secondary offers, dividends, and removals. You'll notice that I did not mention stock splits in the above. This is because (theoretically) a stock split does not affect market capitalization (ex: 2:1 stock split. Shares double, price halves, market cap stays the same). However, any of those other events would require a change in the divisor. To do this, you simply look at all values at time t, and solve:

Index_t = (SLMCAP₁ + SLMCAP₂ + ... + SLMCAP_n)/D_new

For D_new, using all the new SLMCAPs with the change incorporated into them.

How about an example? Assume you had a new entrant into the market (a new IPO). First, you find the current index value the normal way:

Index = (SLMCAP₁ + SLMCAP₂ + ... + SLMCAP_n)/D

Then, you take that index value, and include the new company in the calculation, and solve for D_new (I've bolded the new company for emphasis):

Index_t = (SLMCAP₁ + SLMCAP₂ + ... + SLMCAP_n + SLMCAP_n+1)/D_new

You can disregard the previous D at after you calculate the new value, and go forward using the new value of D until another event occurs such that you need to change it again.

Any questions? I don't know how difficult it would be for exchange programmers to incorporate such a system into their operations. And, as mentioned above, I have no idea how SLQuotes or VSTEX or the ISE calculate their indices. However, I think that each exchange should have some sort of index following it so that investors can more easily get an understanding of how the market has changed.

To SLEC or not to SLEC

Chances are good you know what the SLEC (Second Life Exchange Commission) is. I'm not linking to their website since they don't appear to have one at the moment, with the domain they used up to a while ago featuring a "parking page".

TraderJohn Susa, current SLEC president was kind enough to invite me to the December 12 SLEC open meeting. I was not impressed. The most noticeable thing was this statement from IntLibber Brautigan:

[18:05] IntLibber Brautigan: exchanges that refuse to be controlled
should be openly publicised as refusing to behave by accepted
practices, so as to inform the investor about the risks of doing
business there

So, according to Brautigan, if you are not blessed by the SLEC then you're automatically not reliable, or questionable. As far as I know, the SLEC has not a God given right to rule the SL financial world and tell who's good and who's bad, nor it's written anywhere that it has to be the only regulatory body.

I could go for miles here, but there's so much time I can lose in a day and my quota has been met already.

Cadence Juran, one of the few voices at that meeting, raised some valid points:


[18:29] Cadence Juran: what I am refering to
[18:29] Cadence Juran: is NO member of the SLEC shoudl ever come across as THE single voice

[18:29] Cadence Juran: or no member of the SLEC should ever engage in public spats

[18:30] Cadence Juran: its about always maintaing an appearance of objectivity

Apparently nobody bought into her theories. If you ask me, who spoke against them did not even understand what she meant. At this point, who where the protagonists?

The list is pretty short: TraderJohn Susa and the "Brautigan bunch". Cadence Juran, Nobody Fugazi later, did not change my impression of an overall boring meeting, where a group was following its own agenda.

At the end, I was asked if VSTEX was going to join the SLEC:


[20:17] IntLibber Brautigan: Samantha are you considering joining SLEC ?

[20:17] You: No.

[20:17] Cliff Eclipse: hahahhaha

[20:17] Cliff Eclipse: Sorry
[20:17] Cliff Eclipse: Can I ask why?
[20:18] You: Yes, you can. But at this point we're not gonna comment on this.

When I was asked that question it was past 05.00AM where I live in RL; many times I stated in public my opinions about the SLEC and that meeting did nothing to change them.

I passed the whole meeting transcript to Guardian Market. Maybe he'll find something interesting there.

That's all folks, I know this blog post is not something special and somehow messy, anyway I wanted to share my feelings with you.

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Land Supply

Disclaimer: I'm a land dunce. By that, I mean that I've never owned any land, only have a basic understanding of tier, and do not know the history of the market.

In spite of the above, I still found this SL blog post a few days ago interesting. It looks like Linden Labs has an actual target for land prices, somewhere around L$6.3 / m, as noted in the article. The question that remains is if the market will believe that price. Any land owners here wanna help me out on this one?

The interesting aspect of this article is that in some ways, it resembles setting an target price by Linden Labs for its major commodity: land. Although Ginsu Linden warned of these economic comparisons, I still persist in my observation because of how First Life markets can react to price targets.

Think about it: when you hear a price target for a stock, car, or anything else, what comes to mind? I think the first question is whether or not the source you hear it from is credible. The bum on the corner rambling about how Google will hit $1,000 per share probably isn't your best source, but if Morningstar said the same thing, you'd pay more attention...or at least I would. In this case, I think we can classify Linden Labs as a reputable source on the matter.

However, the next item to consider is whether that price target will be accepted by the market. If the price is too far out of the current range, the market will simply ignore the target. In some of the comments on that Linden Labs blog article, it seemed as though some already have. If the market believes that price target, then it becomes a self-fulfilling prophesy, with sellers trying to sell above the price and buyers going below it, hopefully reaching equilibrium at or around the price target. However, if the market doesn't believe the price target, then they simply go on as is, and it is up to Linden Labs (who control land supply only - not demand) to attempt to get to their target.

So then, if we revisit this topic in say, two or three months, the land prices could serve as a proxy for the combined influence of two variables: how much the landowners in Second Life trust the words of Linden Labs, and how well Linden Labs controls land supply. Two variables are hard to decompose, but it still answers the general question, "can Linden Labs precisely control the land market?"

There are, of course, a myriad of other factors which could come into play in this market, and I am yet unexperienced in it. Comments are very welcome on this article, as I would love to learn about the land scene in SL.