This article speaks to how the adage "buy low and sell high" is not necessarily the case in current-day markets. Confidence grows as the economy picks up. From this, overvalued companies are sold for a "bubbled" amount of money. Is this due to a lack of research or common sense in mergers or buy-outs? More due to investment bankers pushing deals and not caring about the resulting profits or losses?
Regarding the latter, the author states, "Most investment bankers, who earn millions on deals, do little to
dissuade their clients from buying, even at market peaks. 'You can’t blame them,' Professor Rhodes-Kropf (a Harvard Business School professor) says. 'Their job at the
end of the day is to facilitate a deal, not to do valuation. It’s not
their place to tell you not to buy AOL at the height of the Internet
bubble.'"
Thoughts on this practice or on the article in general?
This makes perfect sense, and is a welcome perspective on investment bankers/banking. 'Growth stocks' in general, are typically over-valued. No-one will bother to say otherwise, when they stand to make a profit regardless over its arbitrage.
ReplyDeleteThese people put their "faith" in investment bankers (which is where said bankers make their money). The bankers job is to make the most efficient investments for their clients. As a result of this, those who do not feel the larger effects of the decisions are the ones who are making them, leading to poor investments. Therefore, these bankers hold a large share of the blame.
ReplyDeleteI had an internship at a mergers and acquisitions company that valued small tech companies to be bought by bigger ones. The company relied on bubbles and for large technology companies to make overvalued purchases. This was part of helping one company (and them) get the most money they could for their sale.
ReplyDeleteI feel like investment bankers carry much of the blame for facilitating poor choices but it is the companies that choose to buy and sell during a market peak.
I agree with Joe. I think some of the problems people have dealt with when losing large amounts of money on bubble "bursts" has to do partially with a lack of research and partially with fraud and misguidance on the part of investors, banks, and companies. Enron is a perfect example of this. Many employees lost close to everything when Enron went bankrupt because of their large investments in Enron's over-hyped stock. Many times employees will trust a company and invest their 401Ks or other amounts of money in company stock like they did in this case, especially when greatly encouraged to do so. It is generally not advised to invest everything in on place and some of the employees may have benefited from some research and a different strategy. The problem was, the employees were wrongly misguided and tricked into investing from a company that had fudged accounts and was doing poorly despite their increasing stock values. If a company or a bank is lying or fudging numbers, it's hard for people to research and get the facts straight to make smart decisions. I think it's a two way street but it makes it very hard for the average employee to know what to do when they are lied to. It comes down to the intent of the investors and companies.
ReplyDeleteAnother interesting point from the article and the Harvard professor, "When prices are low, sellers don’t want to sell,” Professor Rhodes-Kropf said. “They know their stock will go up with even modest growth. All they have to do is hang on.” Veronica I also agree with your point that it is ultimately the companies that decide to buy and sell during peaks.
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