The stock exchange is stupid

Due to a mixture of government incompetence, financial market greed and consumer stupidity (in that order) we are now suffering a global financial correction. These happen periodically as part of a well established economic cycle but this time it is going to be worse because there was a big bubble in asset values. Current government action seems to be trying to use taxpayers money to prevent the inevitable, thus delaying the necessary correction. They would be far better off letting the weak fall by the wayside thus getting the whole thing over more quickly so we can sooner resume the virtuous side of the cycle.

The value of stocks and shares is supposed to reflect their ability to earn profit with an element for risk factored in. This is rubbish. In the real world stock and share value is determined by only one thing and that is sentiment. It is sentiment that makes people buy and sell and so force the prices up and down.

And this we can clearly see in the current turmoil. The prices of stocks and shares are taking a beating. In some cases this may well be deserved. But in many cases the underlying value of the business and it’s ability to generate profits is unaffected by current turmoil, yet it is still taking a beating purely on sentiment.

Which brings us to the video game industry, most of which is publicly owned and so has it’s capital in stocks and shares that are traded in the world’s stockmarkets. This industry is massively profitable and is growing very strongly and consistently. It is in the middle of a transition from being entertainment for a niche to being the entertainment of choice for the mass market. It is inevitable that gaming will make this transition because it has the massive advantages of interactivity, connectivity and non linearity. Other entertainment media just cannot compete.

And what will happen to gaming during the current turmoil? It will boom. Just as Hollywood boomed during the great depression. People want and need their escape, their entertainment. And gaming is the best entertainment there is (well, apart from a few adult activities!). So gaming stocks and shares should be unaffected and ride out the turmoil.

But something is going wrong. Due to sentiment game shares are taking a beating. Electronics Arts shares were already very cheap due to the cost of recent restructuring and investment, yet they lost 9% (or $1.1 billion) in one day. Don’t these stock exchange people look at the sales charts? Electronic Arts is reaping the fruit of it’s labours and is making massive amounts of money just now, with a lineup through the holiday season that will see them banking a fortune. At the silly price their stock is at now they make a very juicy potential victim for a big predator media company wanting a stake in the games industry. News International, for instance.

And it isn’t just Electronics Arts. Activision Blizzard lost 13.8% ($3 billion) in value in one day and Ubisoft lost 14.4%. This is just sheer stupidity, there is no way this has anything to do with the real values of these companies.

If anything this turmoil should speed up the rate of industry consolidation as companies rush to seek safety in size. Electronic Arts may look like  a potential target but they can make themselves too big for takeover by buying up some of the competition. Take Two, for instance could now be bought for far less than Electronic Arts’ previous bid. And they will be far more willing to accept it. We are headed for exciting times.


  1. In panic, people don’t think rationally, right?
    That’s shareholding stupidity. It also possibly mirrors the relative ignorance that remains to be brought down about video games after all and new forms of entertainment.
    The good news is that now could not be a better time for investment in the video gaming industry.
    A pity I don’t have a couple of spare millions there, that’s where I’d put my money.

    On a final note, why “consumer stupidity” really? I’d rather say lured victims.
    Or is the gripe against the overall over-consuming habits present in the US and UK?

  2. Recently, I’ve begun trying to leverage my mad gaming skillz to succeed at investing. Believe it or not, in spite of the collapse in the credit market, I’ve been doing pretty well.

    The thing is – you nailed it. The stock market can be highly irrational, especially during downturns. But smart investors look at it as the price of shares (and houses, and other opportunities) going on sale – for a limited time only. The real trick is timing your entry. Well, and exit, but that’s another story.

  3. I can see where you are coming from, but the markets are stupid in the short term, but long term there is some logic.

    To counter your points, I looked at the financial statements briefly, and EA posted $0.5 mil losses last year. Hasn’t been that great in the past years as well. The point is, for the price there are other companies out there giving better prices.

    Another point, in a recession (as all experts seem to think we are in one now) who in their right mind wants to spend £30 on a game, apart from those that are die hard fans. And sadly, there aren’t that many to keep an industry going. Also, any game is availbe on e-bay after a few days for half the price.

    Investment is done with the head, not on passion (atleast for those who want to make invest for the long term)

    My two cents worth

    I love gaming too!!

  4. What on earth made you think that the share price of any company was “supposed to reflect their ability to earn profit with an element for risk factored in”? That’s never been the case, and never will be; to think otherwise is to invent some random personal conception of what a stock market is, and stick to it in the face of, well, all the facts and history to the contrary.

    What on earth makes you think that the plunge in shareprices has anything to do with people thinking the companies aren’t “worth” the shareprices they were at? Have you heard of short-selling? Do you know what happens if you short-sell enough stock at once, and offer it at a discount? Have you heard of de-investing, moving money from stocks back into cash, with the intent to wait for an inevitable share price fall and reinvest later – and do you know what happens when enough people do this at once, too?

    Not to mention that EA (to pick just one) is seeing substantial increases in quarterly losses right now (the shock redundancies aren’t so much of a shcok if you look at the quarterly P&L for the company for the last couple of years), and, you know, it might be quite reasonable indeed to be afraid of something like that and to sell out while the price is still relatively high.

    This post is just a gross over-simplification that ignores plenty of rational and highly probable explanations in favour of cherrypicking a few biased ideas that prop up a specious argument.

  5. Thanks very much for noticing, and for the kind words! I’ve got to admit that it’s a lot more work keeping up a blog than I expected, and the past few months has had plenty to keep us all busy! But I do hope to post a bit more frequently from now on.
    Stocks and Shares ISA

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