理财 Article - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble

The whole article:   The Marginal Buyer Holds The Pin That Pops Every Asset Bubble

Those of you who took an introductory Economics class in high school or college may remember learning that prices are set "at the margin". That's a fancy way to say that prices are set by the person (or people) willing to pay the most.

This person willing to pay top dollar is called the "marginal buyer". Most of us don't really think about him much, but he (or she) is very, very important.

Why? Because the marginal buyer not only determines price levels, but also their stability and degree of volatility. The behavior of the marginal buyer, as well as the degree of competition for his/her "top dog" spot, sets the prices of nearly every asset class held by today's investors.

Imagine for a moment an auction room, filled with people holding their bidding paddles. A rare Picasso painting is brought to the block. Paddles all around the room compete furiously as the auction starts; but as the bid price rises higher and higher, fewer and fewer paddles participate in the bidding. Pretty soon, it's down to just two bidders dueling back and forth with one another. Then, after a stunningly high bid of $106.5 million dollars, no more paddles are raised. The marginal buyer has been found. No one is willing to outbid his price. (For the record, this is exactly what happened back in 2010 when Picasso's Nude, Green Leaves and Bust came up for sale.)

"In a dogged contest at the auction house's Rockefeller Center salesroom, the bidding for Picasso's 'Nude' began at $58 million and shot up quickly, with eight bidders competing for the jewel-toned, 5-by-4-foot painting. Christie's specialist Nicholas Hall, who often advises collectors of Old Master paintings, fielded the winning bid from the unknown buyer over a telephone."

This example contains several important elements for price-setting. First: the marginal buyer's last bid is what ends up setting the final price. And second: the intensity of competition determines how high the marginal buyer's bid will go (if no one else was willing to offer more than say, $10 million, it's unrealistic to expect that the marginal buyer would have still put in a bid as astronomically high as $106.5 million). Now imagine what would have happened if our marginal buyer above hadn't shown up the auction. Maybe he got stuck in traffic, or decided he'd rather own a tropical island instead of a wall hanging. How much would the painting have sold for then?

It would have sold at a price lower than the losing bidder's last offer. Without our hero in the room, the losing bidder would have become the new marginal buyer. And without the threat from a competitor with deeper pockets, it's quite likely our new marginal buyer would have been able to secure the painting at a substantially lower price.

Bubble Territory 

The takeaway from the above is that prices are set by two things: the upper limit that the marginal buyer is willing to pay, and how intensely the competition from other buyers pushes him towards that limit.

This is just as true for stocks and housing as it is for fine art.

And we're now seeing some concerning signs that the marginal buyers, as well as their competitors, are beginning to go on strike across those asset classes.

Let's look at the stock market. For the past 5 years, stock prices have been powering higher. Good, right? Well, not so good when you look at the volume underlying these prices. Volume has been in decline over this period, and the rate of decline has accelerated since the beginning of this year. This means fewer buyers -- less competition -- less pushing the marginal buyer to spend more. Which likely explains why the S&P 500 index is roughly unchanged from where it was 2 years ago.

And as for the marginal buyer, it's increasingly looking like that role is being filled today by the central banks instead of from a wide pool of institutional and retail purchasers (as a proof point: the Bank of Japan now owns over 60% of its nation's ETF market). Putting aside for a moment what an abomination this circumstance is to free and fair markets, having prices set by a central bank is a huge threat to price stability. Why? Because no one else can compete with an entity able to print an infinite amount of thin-air money at will. The gap between what a central bank is willing/able to pay vs the next marginal buyer is tremendous; so if the central bank ever pauses its buying, prices can drop precipitously.

Hmmm, why does that sound familiar? Oh, that's right...that's exactly what happened last August, and again at the beginning of 2016 when the S&P went into violent free-fall. Note how those plunges line up exactly with the two moments over the past year when the world central banks' liquidity spigot was at its lowest.

In a related vein, observe how the historic stick-save the S&P experienced from March of this year onwards corresponds to a sudden and massive ramp-up in net liquidity by the central banks.

We now live with a market dependent on a single marginal buyer: the central banking cartel. This raises some very concerning questions. What happens when it can no longer print at the same rate? (Prices will collapse). Or even worse: What happens if it keeps printing at this rate? (At some point: hyperinflation, as the purchasing power of the world's major currencies gets destroyed)

The Housing Market: Poised For Another Crash? 

Housing is similarly at risk. Prices in many markets have been bid up past their previous 2007 bubble highs.

This recklessly swift return to bubble heights is being indirectly driven by the same central bank money printing we see in stocks. The liquidity of new capital flooding across the world is seeking a return as well as safety. At this point, the US is one of the few markets offering both positive stock returns and (barely) positive interest rates.

So tons of overseas money is flowing in. In popular housing markets like San Francisco, Seattle, Manhattan and Vancouver, the marginal buyer over the past half-decade has largely been foreign, looking to get his cash away from the market and confiscation risk of his native country (I've written often about the impact that the wave of over-asking-price, all-cash offers has had on Silicon Valley, where I lived until recently).

Again, the key question is: What will happen if that current marginal buyer disappears? This is not an academic question; it's a very real risk in these markets. Countries like China are tightening their capital controls, making it harder and more punishable to get money over to the US. In Silicon Valley's Palo Alto bellwether market, you can clearly see transaction volume decreasing as prices first skyrocketed and are now flattening (sound like the S&P?).

And in Vancouver, the marginal buyer there seems to have vaporized practically overnight following the passage of a new 15% property tax on foreign purchasers. The following article was published last month:

"The Deals Are Collapsing" - Vancouver's Housing Bubble Has Burst 

Good luck collecting from the Chinese oligarch buyers.... or even finding them. 

But the most dramatic impact will be on future transactions. With the soaring uncertainty about the future rate of home appreciation, and the availability of "greater Chinese fools", buyers will be far more pessimistic and cautious about paying the asking price, or engaging in the kinds of ridiculous auctions profiled here before, such as that of a house valued at $16 Million, selling for $68 Million "In 7200 Seconds." 

Quoted by FP, Dan Morrison, chairman of the Real Estate Board of Greater Vancouver, said he’s heard of instances of Canadian buyers and sellers who backed out because of the uncertainty in the market. Philipp said one of his offices reported four cancelled deals as a result of the tax, while another reported five failed transactions on Friday alone, with one directly tied to the tax. 

“There’s a domino effect here. One deal collapses, there’s so many other deals impacted by that,” Philipp said.

“I’m getting people coming to our open houses saying, ‘this means the prices are going to come way down,’” said Re/Max realtor Dave Vallee. 

And now this, published just 2 weeks later:

Vancouver Housing Market Implodes: Average Home Price Plunges 20% In 1 Month - "The Market Is Devastated" 

Zolo, a Canadian real estate brokerage, keeps track of MLS home sales in real-time and reports prices as an average rather than the “benchmark price” used by the REBGV. It currently shows a major correction underway in most Metro Vancouver markets. According to the website, the City of Vancouver currently has an average home price of $1.1 million, down 20.7% over the last 28 days and down 24.5% over the last three months. The average detached home is $2.6 million, down 7% compared to three months ago. 

Note how the sudden disappearance of the marginal buyer can set off a vicious downwards chain reaction, as it exposes how far prices must fall to become affordable to the next marginal buyer. And, of course, in a correcting market, few want to attempt to catch a falling knife -- so the potential population of marginal buyers shrinks as they sit on the sidelines waiting for the carnage to abate.

That's the main point of this article: the marginal buyer can evaporate faster than you think. That is the nature of an asset bubble's unavoidable destiny to "pop". 

My Comments:

Two important questions were raised:

• What happens when it can no longer print at the same rate? (Prices will collapse). This is unthinkable in the eyes of the  "government-of-the-day" ("god"). This possibility is hence discounted. The printing press will go on.

• What happens if it keeps printing at this rate? (At some point: hyperinflation, as the purchasing power of the world's major currencies gets destroyed). Due to the non-possibility-of-the-first-question-above, The god has no choice but to continue at the current rate and mostly, at an ever increasing rate (See the fall of the Roman Empire: 8 reasons were given:  1. Christianity 2. Barbarians and Vandals 3. Decay 4. Inflation 5. Lead 6. Economic 7. Division of the Empire 8. Hoarding and Deficit. 3 were attributed to the economy.) The reason was already explained in the "A Nation of Renters", there is simply no way the general populace can keep up with the ever diminishing return of the fiat currency. I am of the opinion closer to the Japan model -- Depression -- zero growth and pure deflation.

But, knowing what's terrible things are coming is not good enough. One must act on this lovely circumstance. To keep postponing the decision to buy is not an ideal strategy. The Winner's Curse ("WC") is always in town.

My Mantra:

As long as there are only 3 bidders or less in the auction room, try to bid to win. The WC would not be too high and the maximum winning bid value would be greatly suppressed.

If the winning bid ended up is quite high, it implies that the underlying asset under auction is of great value. So, one need not worry too much about paying too high a price. During normal days, this asset-in-question would be highly sought after. Of course, there would also be nut cases where the competitive bidder just want to win. Keep the budget at around 10% higher than the reserved price is indeed a very safe and good guide.

The above mantra provides an easy and straight-forward evaluation criterion just before / during the auction. Hence, the converse is also true: "If the number of bidders exceeds 3, just relax! There is little to gain. Just wait for the next available auction and try again."

Meantime, during off-auction days, concentrate on getting a stronger cash flow. 

理财 Article - A Nation of Renters

Preamble

I have read every where that quantitative easing is not working and hence, the latest craze of helicopter money suggested. The article then argued that that wouldn't work as well.

The article explained:

Money is just a future claim on the resource or promise of reclaiming an effort (a debt). Therefore, it has no jurisdiction to maintain its real worth. If for anything, the government-of-the-day ("god") would like to devalue it asap so that the god need not honour as much true debt.

Imagine for a moment the god prints vast amount of money and give it to a group of people. These people then go to a desert place and start to build roads, buildings, schools, power plants, drainage systems, train lines, and every possible basic infrastructure. In no time, a city is built. The people within the city are happy. They get good jobs and great cash flow. They are provided with jobs like administrators, accountants, engineers, lawyers, doctors and managers to run the city proper.

But, if the god stops printing money, then it dawns upon the city dwellers that the city can no longer sustain itself. The city so far has generated nothing new or creative. It is just a city of consumers. Without continuous supply of new money, there would be no piped water or gas to run the electricals. Food supplies dries up as no one could pay for these imports. One by one, people starts to leave and soon, the abandoned city is only inhabited once again by tumbleweed, the true resident of the desert.

Money in quantitative easing or helicopter money has no bearing to the economic cycle. Unless the economy is allowed to recycle itself through boom and bang, destroying and regenerating every now and then, the economy would not self-heal. When that happens, the sickness of excesses is going to accumulate and release at one go. The end result is either a super duper big depression or worse, a world war.

It further argued that unless money is deployed in fulfilling research and development needs (r&d is always about improving efficiency in resource utility and hiking wealth generation) and thereby creating true wealth generation, the other way is going the way of leeches of money such as the bankers or god's wasteful servants. In time, these leeches became too greedy and thereby killing the host that once fed them.

A Nation of Renters

Fast forward ... It is sad that since the printing press belongs to god, it comes as no surprise that in time to come, all assets / resources would be concentrated back to the god. When that happens, the nation has no choice but to become renters rather than owners of income-generating assets.

Let's work an example:

Imagine a nation has 1 trillion in money value and hence, imagine further that it can equate more or less squarely with the 1 trillion units of assets of the nation in total. Therefore, each dollar in money can own / purchase a unit of asset belonging to the nation.

Let's state further, if an asset owner now wants to paint his shop for $2, he asked the painter to come and finish the job. Since the asset owner has no money, he decides to borrow it from the bank. The bank agrees and charges a small fee for the lubrication service and hold his assets as collateral. The painter now holds a $2 claimable debt from any one he so chooses to engage subsequently, be it a food supplier or teacher of his children. If the painter finally claims it, in the eyes of the bank, the asset owner would have owed the bank 2 units of asset. If the asset owner can't fulfill his obligations, his assets would be liquidated for compliance. This is how money is claimed as a form of a debt.

Back to the economy. One day, instead of allowing the economy in recession to correct itself, the god of the nation decided to print another trillion worth of money to "rescue" the economy (the god feared that by allowing the economy to go into recession, it would be hard on the nation and the nation might rise against the god). Such a need to print arises because the tax and toll collections of god is always way below the break-even point and the god needs to pay its leeching servants. Printing of money becomes an easy way out.

Now, with no additional input, each unit of asset is now worth $2. To purchase a unit of asset, nothing short of $2 will do, there is simply no discount.

As a wage earner, there is not an iota of chance to get a 100% increase in wage from the company, so is the business owner in doubling his product prices since none of his customers get 100% wage increase. The net result is that none of the populace will have the increased purchasing power to pursue the asset game. The final and net result is they have to turn to renting to get by.

Be it shops, factories, warehouses, residential houses or anything near tangible, all would be so out of reach to all that the residents have no choice but to do sharing. By sharing, I meant renting of equipment and all asset classes in order to reduce the cost of businesses.

There is no further need to expound the concept of renting. It simply means the lack of ownership and the cost of renting is always heavy interest bearing but yet insufficient for tenants to convert easily to ownership. A death knell ...  

理财 Trick - The Cunningness of Auctioneer

The Mantra:   No one can be trusted !

is really very important. Just when you thought the trust that the valuation of a property auction by the high court and banks must show a discount of 30-40% off the market value must be true, is clearly misplaced. The auctions are just as perilous as any other property purchases.

Let's drive the concept through:

Property 1:

• date / property / price / sf / psf 
• 5-Feb-13 / No. 113 / $46,000 / 3,079 / 15 
• 19-Nov-12 / No. 113 / $51,100 / 3,079 / 17 
• 6-Sep-12 / No. 113 / $56,100 / 3,079 / 18
• 18-Jun-12 / No. 113 / $63,000 / 3,079 / 20 
• 29-Mar-12 / No. 113 / $70,000 / 3,079 / 23 
• 4-Aug-10 / No. 113 / $46,200 / 3,079 / 15 (sold)
• 30-Dec-09 / No. 113 / $51,300 / 3,079 / 17
• 7-Jul-09 / No. 113 / $57,000 / 3,079 / 19 

Initially, in Jul 2009, this property (very poor condition, totally uninhabitable) was first being auctioned off by bank for 57k due to non-payment by their client. But, there were no takers as the world market then was undergoing the Aug 2008 financial crisis. This crisis hit the property market for a good 3 - 4 years after that.

For each auction conducted remained unsold, it is the requirement by the high court that the next bank auction 4 to 9 months later, if any, its reserved price must be reduced by 10% to facilitate sale.  It was finally auctioned off in Aug 2010 at 46.2k.

Again, the Aug 2008 financial crisis continued to bite till 2012. The property was not renovated at all. There was again non-payment by the new buyer. The property was again put up for auction, but the auction reserved price was revised to 70k (an increase of 52%, i.e., ((70k - 46.2k)/46.2k x 100%) is clearly not possible for the period from Aug 2010 to Mar 2012, i.e., 1.5 years!). During this period, almost every one is still worried about their next meal ticket. How can this increase in valuation be possible? True enough, the market has spoken. The property was not sold again until it hit the reserved price of 46k (back to its original Aug 2010 price), which is the correct sentiment of the market during that time, i.e., no increase in market value.

Property 2:

• date / property / price / sf / psf 
• 7-Mar-13 / No.425 / $29,700 / 1,040 / 29
• 3-Jan-13 / No.425 / $32,900 / 1,040 / 32 
• 24-Oct-12 / No.425 / $36,000 / 1,040 / 35 
• 9-May-12 / No.425 / $45,000 / 1,040 / 43 
• 30-Jan-12 / No.425 / $21,400 / 1,040 / 21 (sold)
• 10-Aug-11 / No.425 / $23,700 / 1,040 / 23 
• 10-Mar-11 / No.425 / $26,300 / 1,040 / 25 
• 3-Nov-10 / No.425 / $29,200 / 1,040 / 28 
• 3-Jun-10 / No.425 / $34,200 / 1,040 / 33 
• 21-Jan-10 / No.425 / $36,000 / 1,040 / 35 
• 14-Jul-09 / No.425 / $40,000 / 1,040 / 38

This property told the same story as property 1. Initially, again in Jul 2009, this property (average condition, inhabitable) was first being auctioned off by bank for 40k due to non-payment by their client. But, there were no takers from Jul 2009 to Jan 2012, i.e., a good 2.5 years. This is how deep the Aug 2008 financial crisis was.

With reducing 10% prices of each subsequent auction, it remained unsold till Jan 2012 and finally sold at 21.4k.

But, the new buyer did not go through the purchase. The property was again put up for auction, but the auction reserved price was suddenly revised to 45k (an increase of 110%, i.e., ((45k - 21.4k)/21.4k x 100%) is clearly not possible for the period from Jan 2012 to May 2012, i.e., an ultra short period of 4 months!). How can this increase in valuation be possible? True enough, the market again has spoken. The property was not sold again until it hit the reserved price of 29.7k (almost back to its original Jan 2012 more reasonable price of 21.4k, there is of course an increase in number of bidders as the property is considered highly inhabitable and contributed to the winner's curse), which is the correct sentiment of the market during that time, i.e., no increase in market value.

Property 3:

• date / property / price / sf / psf
• 7-Dec-15 / No. 4 / $405,000 / 5,415 / 75 (sold)
• 9-Sep-15 / No. 4 / $450,000 / 5,415 / 83 
• 16-Jun-15 / No. 4 / $450,000 / 5,415 / 83 (technical court issue)
• 13-Jul-10 / No. 4 / $148,803 / 5,415 / 27 (sold)
• 21-Oct-09 / No. 4 / $165,337 / 5,416 / 31 

This property again told the same story as property 1 & 2. Initially, again in Oct 2009, this property (very poor condition) was first being auctioned off by bank for 165.3k due to non-payment by their client. But, there were no takers from Oct 2009 to Jul 2010, i.e., a good 1 year due to the Aug 2008 financial crisis.

With a reduced 10% price of the subsequent auction, it was sold on Jul 2010 at 148.8k, after a 10% reduction in reserved price.

With no new renovation (still originally uninhabitable), the new buyer could not keep up with the installment payments. The property was again put up for auction in 2015 (5 years later), but the auction reserved price was suddenly revised to 450k (an increase of 202%, i.e., ((450k - 148.8k)/148.8k x 100%) is clearly not possible for the period from Jul 2010 to Jun 2015, i.e., a period of 5 years!). How can this increase in valuation be possible? True enough, the market again has spoken. The property was not sold again until it hit the reserved price of 405k on Dec 2015 (a period known for very bad winner's curse).

it is indeed interesting to see that even at its worst, the owner is not any worse off, as the bank has assisted the owner in getting rid of a very hard to sell property and profited a clear 172%! A good thing. But, due to the non-payment of the owner to the bank. This owner can only play this trick once in his/her lifetime.

The amount of renovation to make it inhabitable is huge.

It remained to be seen if this property 3 would be out in the market again some time later.

In summary, it is difficult to see the real trend as there are so many factors influencing the auction price at any one time. It is therefore extremely wise of the investor to look before jumping. The valuation used by the auctioneers and banks are clearly a serious trickery and never to be trusted. The safest bet therefore must be to look up its historical price trend before committing to a go-for-the-auction. Otherwise, the mistake made could potentially unravel all past successes.

理财 Term - The Winner's Curse - Technique

Quantum

Another relatively unexplored concept is quantum.

If one tries to participate in an auction that almost every other person finds the reserved price easy to bid with / without any bank financing. Then the over-bid price of the Winner's Curse (WC) is going to be very demanding, whether it is in the boom or bane period.

But, if the reserved price is high for most common bidders, then even in a boom period, the number of bidders will remain very small. From market observations, the quantum of 200k and above remains a good guide.

So if these properties are gotten during these boom periods, the harm if any is going to be minimized.

Auctioneer's trickery

It is not unusual for auctioneer / bank / valuer to collude and set a relatively high reserved price for the property during boom periods. Bidders are advised to double-check the historical price charts before bidding.

Summary of the technique

• Residential properties only. There are occasions where even the commercial / industrial properties are relatively cheap. Don't go there. There are always things that we are not aware of. Agricultural properties have a special application in my heart. Read it in another blog entry.
  
• Commercial application - The bid residential property must have a commercial application to be viable long term.
• Reserved price quantum should be higher than average folks' affordability, i.e., above 200k, 1m if possible.
• Historical price charting and checking is a must.
• Bid only in a less-than-3-bidders auction and bid no more than 10% above the reserved price. It is quite usual that the winning bid in a 3-bidders-or-less auction to be less than 10% of the original reserved price. OR always bid no more than 10% above the reserved price even if it is not likely to be successful.

理财 Term - The Winner's Curse Worked Example

Auction Date :   24 Jul 2016
Auction Reserve Price :   $30k
Tenure :   Freehold⁠⁠
Condition :   Poor

There were 208 viewers to the property. Based on 1 bidder arising from 40 viewers, there would be 5+ bidders to the property.

On that day, 6 bidders turned up (exactly according to estimate). The auctioneer started the bid at 31k, with 5k as the bid gap for raising hand. The successful bid was 76k (an increase of 153%).

The condition of the property is poor and requires quite a bit of fixing. The value is priced at 43k (it is usual for valuer to price the property to be auctioned at 30% off its estimated market price, i.e., 70% of 43k = 30k). The meaning of 43k essentially means one can easily get another similar property around the vicinity with similar condition.

To pay for 76k instead of at most 43k (i.e., 76k - 43k = 33k, equivalent to buying 2 properties at the same time) is definitely unwise and at play with the Winner's Curse (WC). At this time (still relatively boom period), one would be better off just buying a property from the available market. To try to win / buy in the auction market is bad idea.

It remains wise to bid in an auction where there are 3 or less bidders. It represents the bane period for this property type. Successful bidding would make the investor very happy in time. Any successful bids for any property type, without paying WC, are always superior purchases.

Footnote:

It is very often that mindful bidder would not be successful at all in most auctions. But, a 1 - 2 successful bids per year would have enhanced my portfolio greatly. I can't be buying properties infinitely with no budget constraint.

In fact, this above-captioned property, with a proposed renovation of 25k, would make the property rent-able (or saleable) only at $0.5k per month, i.e., an ROI (return- on- investment) of 5.9% (0.5k x 12/[76k+25k]x100%). Although this ROI looks reasonably good for this particular property, it is not true if the successful bidder just only pays 30k+25k(reno), giving a ROI of 10.9% (0.5k x 12/[76k+25k]x100%). 

I have bid successfully for a similar asset class at 25k 2 years ago with no competitive bidders, giving a ROI of 12% (0.5k x 12/[25k + 25k] x 100%).

I have been unsuccessful for this new bid. I shall wait for my next lucky strike then.

理财 Term - The Winner's Curse

The Winner's Curse (WC) is a phenomenon that may occur in common value auctions with incomplete information. In short, the winner's curse says that in such an auction, the winner will tend to overpay. The winner may overpay or be "cursed" in one of two ways: 1) the winning bid exceeds the value of the auctioned asset such that the winner is worse off in absolute terms; or 2) the value of the asset is less than the bidder anticipated, so the bidder may still have a net gain but will be worse off than anticipated. However, an actual over-payment will generally occur only if the winner fails to account for the winner's curse when bidding.

The first formal claim of the WC was made by Capen, Clap & Campbell (1971), three petroleum engineers, who argue that oil companies had fallen into such trap and thus suffered unexpected low profit rates in the 1960’s and 1970’s on OCS lease sales “year after year.” Many economists argued that this is bullshit. After all, such a claim implies repeated errors and irrationality.

A "jar experiment" was conducted by Bazerman & Samuelson (1983), where a jar of coins was auctioned off to a class. The jar was over-bidded and the winner made a loss.

Kagel & Levin (1986) studied WC and concluded that the WC is “alive and well” in many auctions, even considering the rational behaviour of many bidders. So did Dyer, Kagel, & Levin (1987), Kagel and Levin (1991), Kagel, Levin, & Harstad (1995), Levin, Kagel, & Richard (1996), and Kagel & Levin (1999). It was concluded further that even professional bidders did not out-perform students in the jar experiments.

In Kagel & Levin (2002), they concluded that the learning to cope with the WC is very slow and even if there is learning, results suggests that it is situation-specific.

In fact, the WC is a phenomenon found in a variety of environments other than auctions. Cassing & Douglas (1980) and Blecherman & Camerer (1998) find it in baseball’s free agency markets. Dessauer (1981) suggests it exists in bidding for book publishing rights. Roll (1986) suggests it exists in corporate takeovers. Rock (1986) presents a model in which the observed under-pricing of initial public offerings is a direct result of the WC problem facing uninformed investors, and Levis (1990) provides empirical evidence (from British IPOs) that suggests that the WC and interest rate costs explain this under-pricing.

Experimental work related to the WC has become a small literature, surveyed in Kagel and Levin (2002). It seems that presently only a few economists doubt the existence of WC-type of behavior in the lab and more and more are willing to accept that such behavior may indeed exists outside the lab in real markets.

Literature continues to be published as I write.

My Comments

I wept. I didn't realize that at my age, I still can uncover a new concept on my own. This concept was only formalized by experts only in 1971. A mere 44 years ago. Before this, I didn't encounter any literature concerning the existence of WC. 

After I have done some research on WC, I realized my concepts are well beyond what the literature has suggested. I am enormously pleased.

My participation with public auctions was not short, a good 2 years. During this period, I was consistently frustrated by the lack of success in all my bids. No matter how high I set my bid budget, there is always this one bidder that bidded way above my limiting bid. In the end, I always ended with none. After a while, I became irrational, I started to bid higher and higher. Fortunately, the great tengri was with me, I was not at all successful in my tries.

But, slowly a pattern began to form. I noticed that auctions that have few bidders like small groups of 2-3, the successful bid is well within expectation. When the group becomes large like 5-6 or more, the successful bid is very irrational to the point of emotional. When the reserved price is low, the bidder group's size is very large. When the reserved price is high, the bidder group's size is very tiny.

With this pattern, I was immediately successful and incurred very little WC on the way. I only bid in auctions that have sufficiently high reserved prices and hence, attract only tiny bidder groups. When this was not the case in time, I just refrain from bidding and enjoy the bidding show in play.

Successful bids done this way tend to be very profitable in gaining values.

Sometimes hidden behind these auctions is the presence of under-covered value, such as the possibility to change its use eventually. This is a very important factor in WC, as any undiscovered value would help to mitigate the WC no matter how ridiculous it seems with the overpayment of asset through WC via auctions.

Another great factor that most literature didn't address is the timing of the market. If the market is bad, the number of bidders would be greatly reduced. In the better days, the number of bidders per auction would similarly be increased, thus making the WC worst ever.

Beta Value

Actually from my observation, WC is just another way of saying volatility, a measure of the asset's beta coefficient. During the market's boom phase, the stocks are sentimentally traded at well above its true value (large number of bidders, rash, unreasonable). While during the market's bane phase, the stocks are sentimentally traded at well below its true value (small number of bidders, conservative, reasonable).

Therefore, if I trade during the boom periods, I would easily make a loss (maximum WC). But, if I trade during the bane periods, I would easily make a gain (minimum WC). Players are too emotional and over-reactive to sentiments. They release their assets easily during bad times, but clingy during good times.

In sum, WC is nothing new, just another way of addressing an existing phenomenon present in the common market place. Noticed Warren Buffet never trade during boom phase, he always picks his winners during the bane phase and exacts very painful conditions for the loans dished out to the ailing targeted companies.

I cannot behave differently.

Success Bid

Sometimes it is easy to start blaming everyone else that the market is so irrational and the success bid is way too high. As a result, the winner just wants to win the bid, but not take the prize. My submission is that if the bid is not beyond everyone else's reach, then how on earth any one in the market allows the winner to walk away with the prize without paying very dearly for that honour in the first place.

Due to monetary inflation (the incessant money printing), real estate in the longer haul is always upward trending, survive the initial limiting conditions, all would end well. This is indeed a nice journey. A little bit emotional but that's the reason in the first place why there are always over-bidding.

Public Auction is Good

Qualifier: Bank auction's reserved price is always marked at at least 30% off its true market value so that the asset can be sold quickly to recover its monetary value. The bank is not interested in maximizing the loser asset owner's asset value. Therefore, participating in auctions would make good sense.

When there is high reserved price, it implies that the reserved price of the underlying asset value is high. Participating in higher reserved price attracts less number of bidders.

Footnote: 

One blooded relation asked, "Even during bad times now, the number of bidders are still too many."

It is of course true. Even in bad times, there are still assets that are very attractive to the folks. So during the auctions of these assets, more bidders than expected would still participate. If one has the stomach to fight the game, one could still win at all costs and the WC would be higher than average, but would still be much lower than during those boom times, where one could easily see 100+ bidders for one tiny piece of land.

Another take of the situation is the times currently is still not hard enough due to the presence of money-printing press. Give it a while more, interesting times ahead. 

To many, printing money is no sin. Therefore, one should exercise a little more patience when it comes to market crashes. No one like to sell during market crashes, but do they have a choice?

Investment Ideas - The Start of a Nice Journey

I have many investment failures. Most of the time, they failed because I was the reason why the idea fails.

Over time, I hope I could be wiser and better at things called investment ideas.

From now, I shall concentrate on what works and not too bothered about what's not.