Photo Credit: Eric Golub
I recently looked up a stock quote for Tesla, the luxury electric car manufacturer that everyone either loves or hates. I happen to hate it. In any case, its stock was trading for around $300 a share, which really got me thinking.
When Tesla finally files for bankruptcy, I was curious as to how much wealth will be destroyed. Now I use the term "wealth" very loosely here because the value of Tesla's physical and intellectual property will not be extinguished in a bankruptcy, just transferred to different owners. But the value of that property will be far lower than the current market value of all of Tesla's outstanding securities.
In order to calculate this, I needed a number called enterprise value, or EV for short. The enterprise value of a company is the sum of a firm's stock, debt and preferred equity market cap minus its cash balance. It is, more or less, the total net value that the market currently assigns to a company.
Tesla's EV turned out to be a mind-blowing $59 billion. I describe this number as mind-blowing because in the event of bankruptcy, Tesla's tangible and intangible property will probably have a value of no more than $5 billion. That number could be significantly lower, too, - perhaps just $1 or $2 billion - if we happen to be in a recession when the firm finally collapses.
All that "wealth" between Tesla's current $59 billion EV and its theoretical $5 billion liquidation value is effectively imaginary, and will eventually disappear.
But as interesting as this might be, it isn't the crux of my article.
You see, I looked up Tesla's enterprise value by opening up my computer's web browser and navigating to the EDGAR website. EDGAR is the SEC's electronic database of company filings. It took me a grand total of 3 minutes to find the pertinent data from Tesla's latest quarterly report.
This is actually quite remarkable if you stop to think about it. Investors today have almost unlimited amounts of information at their fingertips. Do you want to know the latest depreciation numbers for some obscure penny stock? No problem. It is available at zero cost, other than a couple minutes of your time.
Before electronic SEC filings became mandatory in 1998, important financial data was much harder to get. In those days, if you wanted to know a specific tidbit of data, you actually had to visit the SEC and pull a paper filing from their archives. In fact, back in the 1970s and 1980s some investment firms used to maintain satellite offices in Washington, D.C. just for the sake of being able to access corporate filings before anyone else.
The idea that some investors might know important facts about a security or investment that other investors don't is called information asymmetry. And it is almost universally considered a bad thing in both economics and investing.
In 1970, the economist George Akerlof wrote a famous paper about information asymmetry titled The Market for Lemons: Quality Uncertainty and the Market Mechanism. This groundbreaking study examined a hypothetical used car market where only the sellers know if the vehicles they are offering are "bad" lemons or "good" peaches.
Because car buyers don't know if any specific used car is good or bad, they will only be willing to bid lower, "lemon" prices. As a result, higher quality, "peach" cars will be withdrawn from the market as they cannot command a fair price. Bad used cars will drive good used cars out of the market.
But is information asymmetry really universally bad? Today, all investors have access to just about every piece of information available about any conventional asset. Nobody has a definitive information edge (unless you have your nation's central banker on speed-dial).
However, instead of ushering in an investing golden age, the lack of modern information asymmetry has contributed to indiscriminate speculation and serial asset bubbles. The reason for this is because mountains of quickly and easily available data give investors a false sense of security about their investment decisions.
Investors in high-flying stocks implicitly believe that the companies they hold must be worth their current market value. After all, don't all these firms file timely and accurate financial statements that are instantaneously available? If any of these public filings revealed embarrassing or damaging information, wouldn't the market instantly react to these revelations by immediately punishing the company's stock price?
In a word, no. Currently, investors are supremely confident that they are making all the right moves. A lack of information asymmetry only emboldens them. They do not stop to think that maybe somebody knows something they don't. The absence of information asymmetry breeds investor complacency.
Luckily, I believe there a simple solution to this problem - diversify into markets that still retain a degree of information asymmetry. This will help ensure that you purchase assets at a reasonable price.
And right now no market has more information asymmetry than the antiques market.
Let me just give you an example. The British Royal Mint has struck proof versions of their gold Britannia bullion coins from 1987 until the present. These beautiful coins feature the shield and trident wielding goddess Britannia (the personification of Great Britain) on their reverse and the bust of Queen Elizabeth II on their obverse.
But there is a little-known fact about proof gold Britannias. Even though they are modern coins struck by a first-class national mint, it is almost impossible to find their mintage numbers. This example of information asymmetry is interesting because most modern bullion coins are struck in large numbers, rendering them less than ideal for collectors.
But British proof gold Britannias are a little known exception to this rule. Although you can't pin down the exact mintages, in most instances the series is incredibly rare. Most proof gold Britannia coins have mintages of just a few thousand specimens. Some have mintages that are even lower - in the hundreds! This is a shocking level of scarcity in a world where commemorative coins are often struck by the millions.
British Proof Gold Britannia Bullion Coins For Sale
And yet these masterpieces of modern coinage generally sell for no more money than generic gold bullion coins. The market completely disregards their proof quality, great design and extreme rarity. And I attribute this pricing anomaly solely to information asymmetry. Gold proof Britannias are simply so rare that people don't know they are rare!
Although I've used gold proof Britannias as an illustration, there are many other areas in the antiques market where information asymmetry - rightly or wrongly - suppresses the prices of items. Savvy investors are aware of this phenomenon and take full advantage of it. You should too.
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