Sunday, May 27, 2012

Darts, Efficient Market Hypothesis, and Facebook.

In my post a few days ago about the crazy prices that people were (and are) willing to pay for Facebook's common stock (Jeff Mathews had a good piece on it too), I off handily said something about throwing darts at a Wall Street Journal and thinking that the stocks the darts landed on would probably be better bets than Facebook. Given that hedge fund managers are furious about what happened, I thought that I would bring some light hearted humor to the situation that is apparently going to cost the various market makers and/or the NASDAQ a hefty sum of money.

That's right- last Wednesday, one of my buddies and I went to one of our favorite pubs (which was surprisingly empty) to do a little experiment... I figured that what I off handedly said in reference to a contest inspired by a flawed book would make for an interesting thought exercise. We would throw darts at the Wall St. Journal, see what they landed on, and compare the results to that of Facebook's stock over various intervals of time.

Each of us got 3 darts and beer of choice. Luke made the throws for his 3 stocks first.

His stocks were General Dynamics (GD) at a price of $64.55, Braskem S.A. (BAK) at a price of $11.10, and Hospira (HSP) at a price of $32.65.

And now, for my throws.


My first 2 throws landed on Whiting Petroleum Corp. (WLL) at a price of $46.23 and what we thought was to a bit to close to call between Sara Lee and SanoFi ADS. As such, I decided to get the unbiased opinion of one of the drunks at the bar, who ended up being quite insistent that my dart had landed slightly more towards Sara Lee (SLE) at a price of $20.84. For my last dart, it was was as if the godfather of value investing- Ben Graham himself, had guided my dart from beyond the grave to land on the B shares of Berkshire Hathaway (BRK-B) that were fetching a price of $79.80... you just can't make that stuff up.

Honestly, I don't know much about any of the stocks other than Berkshire Hathaway and a touch about Sara Lee... though, after briefly looking at each of their financials (I didn't read any 10Ks), I would think that I would be much happier owning any of the stocks that the darts chose than I would be by owning Facebook (FB). And that says a lot, as these are all companies that I would generally stay away from! For clarification, the WSJ was quoting closing prices for Monday, May 21st, 2012 and on that day, Facebook's closing price was $34.03. It's a price that while ~$8 dollars per share lower than the highs it hit just the trading day before, represents a company trading at seemingly sky-high multiples of nearly every financial metric in existence.

The great thing here, is that this is a total experiment. As Warren Buffett has said, investing is like a game of baseball where no strikes are called. I have very little knowledge of any of these stocks, and as a result, am implicitly taking a pass by not owning ANY of them. Even if Facebook stock somehow shoots to the moon (it would take a more than a 500% gain to compete in market capitalization with Apple), I won't give a damn, as I wouldn't have been comfortable owning the stock from the get go- I simply don't understand it well enough to justify the purchase price. The same is true for the 6 stocks we randomly selected... actually, I take that back- I wouldn't mind owning Berkshire.

So where will each of the stocks be in a year? Who knows... but it will be fun to watch. Just for the sake of entertainment, I will say that 4 out of 6 of the companies will do better than Facebook over the next few years. Regardless, I will feel like I ended up winning because at the end of the evening, not only did I not own Facebook's stock, but what was meant to be a few beers and an uber-geeky hour of darts turned into a night of drinking and a pretty good Heartless Bastards show.

Disclosure/Disclaimer: I have no financial position in any regard to any of the entities mentioned. I reserve the right to change any of my positions at any time. This is not advice of any kind, is solely my own opinion, and is obviously for entertainment purposes. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

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