Brad DeLong's Semi-Daily Journal (2004)

Were you reading the same article I read? In particular:

"The only way we can win, meanwhile, is if we bid in the "winner" range but below the price at which the stock trades in the aftermarket (highly unlikely). One reason IPO auctions have essentially been abandoned worldwide is that these odds stink. (Good thing we're not acting rationally.)"

"suspect that many will play the Google auction game for the same reasons I plan to: out of curiosity and fun and/or the remote possibility of getting shares at a reasonable price"

my mom gives me that reason when I ask her why she plays the lottery

Isn't there economics literature on auctions to the effect that winning bids at autions always overshoot their mark, that the second or third highest bids are more accurate measures?

Brad,

Amazom great success? 10 years old and made its first profit this year, entirely on the EU currency exchange rates. Still worth minus $2.18 a share net. I have to say you have a strange view of success for an economist. Usually you have a more keen observation than this one.

I think you are talking about two things from the auction lit at the same time. First, there is the "winners curse" which essentially says that if everyone guesses at the value of something when they bid, and the high bidder gets the item, then it follows that the winning bid is from the person who has likely overestimated the true value of the item. Assume independent private values drawn from some nice distribution, etc....

Second, there is the phenomenon that under some basic assumptions like independent private values, in a second price sealed bid auction (highest bidder gets the good for the bid submitted by the second place finisher), you should bid your true value for the good. You should not "shade" your bid to capture some surplus...

Of course, in the real world, we don't typically have independent values drawn from some nice distribution...

Am I correct in thinking that Slate's hiring of Blodget as their Wall Street correspondent is the stupidest bit of stuntcasting in ever?

Hey, Blodget wasn't banned from the profession for life for nothin.

Ah, this brings back memories... I wonder whatever happened to Mary Meeker?

Blodget banned, is this an acceptable comment? Seems a little dodgy.

RC: Would you say Amazon is performing poorly at this stage in its history? Historically, how have startups done on average 5 years out? I took Brad's point to mean that independent of the money poured in to its stock - thanks to the Blodget's of the world - the company seems on a path of sustainable profitability. that's not to say it was a good investment. But there's more to being a success than making a killing in the stock.

So how about shorting Google?

"Isn't there economics literature on auctions to the effect that winning bids at autions always overshoot their mark, that the second or third highest bids are more accurate measures?"

Just to be clear, the mechanism is not that bidders who "win" pay what they bid for shares. It is that all bids at or above the market clearing price (i.e. the price at which all available shares would be sold) pay only that market clearing price (or something less than that at Google's discretion). Not saying that it makes sense to bid, but the issues people are raising are not the right ones.

He was banned from the securities industry for life Armando. Since when is stating a known fact "dodgy"?

RC: You did not understand the professor. His point was that a firm may be an outlier success in its own business and still deliver unimpressive returns to investors in its IPO. He meant this as a warning away from IPOs. Whether he is right or not is unclear, but he is coherent.

Actually, Brad, you are incorrect in thinking that Amazon is selling for 1/10 of what Blodget predicted. Amazon's stock split 3-for-1 about a month after Blodget's prediction, and split again 2-for-1 later that year, which means his split-adjusted forecast price was $66.67. Today, Amazon's stock today is trading at $37.61, which is about 56% of Blodget's target, not 10%.

Also, RC's take on Amazon's performance is absurd. Any company with $5 billion in sales, growing revenues at 30% a year and generating $300 million a year in free cash flow is a success by any standard. It took Wal-Mart more than a decade to start generating free cash flow.

Finally, to Gerard's point, I have little doubt that Google will be fairly valued at best and overvalued at worst, leaving little upside. But Amazon has hardly delivered unimpressive returns to investors in its IPO. If you bought Amazon stock at its IPO price, right now you'd be sitting on a gain of 2500%. Even if you'd bought it at the end of trading on the first day (during which the stock had risen sharply), you'd still be up 1500%.

What is Google going to do when centralized search technology is replaced by distributed peer-to-peer search technology which can't be controlled by one entity?

Shane -- Nobody knows how to make peer-to-peer search fast enough.

And Amazon spent a fair bit of time selling above the infamous $400 prediction, from what I recall. Of course, I'm sure that had Blodget thought that would happen, he'd have said $600, but still.

Blodget in January 1999: "Unlike with other famous bubbles the internet bubble is riding on rock-solid fundamentals, perhaps stronger than any market has any seen before."

"Blodget paid $4 million in a settlement with federal regulators last April [2003]. He neither admitted nor denied wrongdoing, but agreed to permanently leave the securities industry."

""For me personally it's been a brutal couple of years," Blodget told CNBC on Monday."

"The [Slate] editor said any concerns he had about hiring Blodget were erased after he talked to the former analyst. Weisberg said he believed Blodget "got kind of a bum rap" in the stock-analysis probe."

I find it hard to believe how corrupt America is. It boggles the mind.

http://www.usatoday.com/tech/webguide/internetlife/2004-01-15-blodgett-rides-again_x.htm