20th of September this year marks not only my birthday but also the end of a week that featured 3 referenda from various parts of the world and the the biggest ever IPO in the history of the capital markets. Viewing it all from the beautiful city of Seattle means I am somewhat detached from it all but it doesn’t stop you from wondering about the behaviour of herds.
First up in this global display of the joys of democratic expression was in the Melanesian paradise of Fiji, a state which has had more coups than a flock of pigeons, and which was having its first election since Commodore Frank Bainimarama seized power in the most recent coup in 2006. The voting papers featured the candidates as numbers, Frank triumphed with 60% of the votes, and the regional powers of Australia and New Zealand wondered if their sanctions and rhetoric over the last 8 years had actually counted for anything. The Fijians themselves seem happy.
A day later saw the Scottish referendum on “independence” (actually on voiding the treaty on formation of the union with England and Wales) which – despite considerable hysteria in the final week leading up to the vote – was voted down 55 to 45. This was a huge win for the Scots as they have got concessions from Westminster leading up to the vote that gives them independence in all but name but also leaves them squarely in the United Kingdom with all the population base and tax revenue that that entails.
Yesterday, in the quarter acre pavlova paradise that is New Zealand, we saw the unprecedented sight of a single party winning an outright majority in an MMP electoral environment. While this may turnover after special votes are counted it is an extraordinary performance, especially for a government seeking a third term. Clearly the voters are happy with the (rather dull) centrist policies of National and have voted based on their most recent perceptions of calmness and stability.
In amongst these plebiscites was the IPO of Ali Baba, the Chinese internet conglomerate, on Thursday. This was as close to a riot as it is possible to get in the mad world of sell side share trading and may go down in finance folklore as the ultimate example of irrational exuberance. The IPO offer price and number of shares to be offered were upped three times before $26B worth of shares were sold at a price of $68 each (initially, expectations were at the high $30s/low $40s) with trading opening at $92.70, a 38% premium to that. Many fund managers and professional investors stayed away [ludicrous valuation, suspicions of dubious trading in items such as counterfeits, etc] yet the public voted with their feet (and wallets) determined not to miss out on the “next big thing”.
So what do these 4 events have in common? They are all remarkable examples of not just herd thinking but – more importantly – of the biggest danger to analysis by voters/investors/any groups of common purpose and that is the extrapolation of a current condition out into the future, a condition known as “recency bias”. It is usually associated with extreme feelings of either euphoria or dysphoria and are decisions that are therefore not generally based on sensible analysis. Time will be the judge on how these events are seen.