T. Rowe Price Marks Down Most of Its Tech Startups | Hacker News Reader

T. Rowe Price Marks Down Most of Its Tech Startups

morningstar.com

61 pointsbaus50 comments

IMO, these valuation write downs are not driven by the decline in the value of underlying assets but the lack of liquidity of positions in such assets.

When the liquidity seized in high yield corporate bond market in Q4'15, it brought in to focus liquidity of all other asset classes. Most institutions dealing in assets that are not readily tradable are demanding higher discount for risk due to lower liquidity of such assets. This is resulting in lowering of fair market value for such assets. This is happening all across the alternative asset space and not just for private startups.

'lack of liquidity' is just another way to describe the situation where there is no buyer at the price you want. I have an amateur painting that I really like and would not part with unless I was offered $1000 or more. However, nobody would actually pay that because it's not that great (it just has sentimental value to me). I don't pretend that the art market is just in a 'liquidity crunch' because I'm not able to sell it, I just recognize that the market value of the painting is much less than I'm willing to accept.

People in finance like to use this phrase to describe unpleasant market pricing behavior to help justify the losses they would realize if they had to sell in the current market. "there was no housing crash, just a liquidity lockup that made people desperately sell their homes!"

You don't understand the concept of liquidity.

Finance people (and anyone else with a hat full of brains) knows the difference between a market clearing price, and there being no liquidity.

No liquidity means: I can sell 500 of these shares per day (paintings, buildings) for price x but no higher - while at normal times I can sell 50,000 of these for price x but no higher.

You just echoed exactly what I said. Lack of liquidity is just another name for lack of demand at the price you want. You could certainly sell more than 500 shares if you started lowering the price.

Let me ask you a question (since you "have a hat full of brains"), would you value Tesla the same if they were able to generate sales for 500 cars at the current price rather than 50,000 at the current price?

If you can 'normally' sell 50000 units of something in a day at price X and suddenly you can only sell 500 units for price X, it means the demand is gone at that price point. Basic supply and demand applies to everyone, including people with hats full of brains.

Take any market that is in a "liquidity crunch", and cut the asking price by 90% of what you're trying to sell and see how quickly liquidity returns.

Long term capital management paid a hefty price to learn that no demand because of "lack of liquidity" is the same thing as no demand because people don't want to pay the asking price.

There is no such thing as "normal times", there are just current market conditions. Oil traded at close to $100 during "normal times" just a couple of years back. Coal companies were good investments 10 years back. There are lots of people waiting for the market to return to "normal times" that will be waiting a long time.

While I see your point, there is also a difference in kind between no one buying your painting at $1000 because it isn't worth that much, and no one buying any painting for $1000 because they are afraid and being extra causcious with the money...

The underlying assumption of "normal times" is what can cause problems with the concept of liquidity for assets that are rarely traded. E.g. if you define "normal times" as "the one transaction that occurred when I bought the asset".

There is always liquidity -- at a price. To give an extreme example...i'm standing ready to buy ANY startup at $1. Guaranteed liquidity.

I note this because il-liquidity is usually an indication of a decline in value. It means there are smaller numbers of uninformed buyers out there to buy something at an inflated price.

I think you mean any startup with a limited liability structure!

Surprised that Evernote is down by 21%. It's clearly a walking dead, should be down 100%.

> It's clearly a walking dead.

That's a very strong statement to make against a company whose competitors are no more compelling that itself.

The problem is we've been getting these markdown stories every month for a year, now. At this point they seem pretty meaningless and arbitrary in terms of whether they signal an imminent crash.

In other words, these stories are interesting, but about as valuable as a signal as the "imminent tech bubble crash" stories we've been getting every year since 2008.

We've gotten so used to boom/bust cycles that we try to cram everything into that narrative, and anything that doesn't fit is disregarded as meaningless. This is what a functioning market adjusting inflated valuations down looks like.

what do you mean by an imminent crash? in some sense, widespread markdowns are a crash. Since public markets don't appear overvalued, it's a crash in private valuations and it's going on now.

It's a popular opinion that a crash is possible, if not likely.

Are there any tax benefits to such writedowns?

If I were on the west coast, I would give no shits about east coast valuations. They lost that privilege when they marked mortgages wrong. Keep building rad tech, we'll keep buying it. Sales are all that matters.

Unless you're trying to raise money, and then valuation by investors is suddenly important.

On the east coast they buy assets, in the midwest they buy sales, on the west coast they buy ideas. Valuation is subjective dependent on how you evaluate fpv. Risk quantification is not a science it is an art. Capital allocators are allowed to evaluate roi however they want my point is that the current trend of marking down companies isnt a sign of decreased value it is a signal of decreased risk appetite.

I've never heard the regional "apetite" broken down like that before. But it feels right. I'd love to see some numbers/more data on this regional mindset.

What do you mean by buy sales?

They invest based on a sales driven valuation.

Stated less cleverly: The East coast places a premium on assets. There is an expectation that these assets will increase in value. Think mortgages.

The Midwest places a premium on sales. Think GM/Ford and the Detroit auto industry.

The West places a premium on ideas, a la Silicon Valley.

The point being made is that East coast and Midwest investors have very different notions of valuations from West coast investors. Perhaps the recent write downs are unprecedented not because we are in a bubble, but because we've never had non West coast investors be this active on the West coast.

Edit: I'm not terribly opinionated here, just elaborating on the original point.

I get the point you are trying to make but mortgages are not a good example of an asset that appreciates. The underlying real estate my appreciate in value, but the mortgage itself does not. Investing in mortgages would be an example of a fixed income security. You can of course invest in derivatives like credit default swaps which may appreciate in value, but at that point you are not buying mortgages, you are basically buying insurance (which can appreciate in value if the thing you are insuring against becomes more likely to happen).

You're incorrect. If interest rates drop, then the value of the mortgage increases. But without that, you're getting a return from the interest of the mortgage. If you have a strip bond, where you pay a deep discount to the value of the bond, with no interest payments, then your bond does indeed gain value over time.

there is some truth to the idea that midwest investors are more conservative, but fundamentally businesses exist to deliver earnings. Sure, when they are not profitable and are growing their revenues really fast, this may be an indication of future high earnings - but as soon as that growth rate comes down, so does the valuation. It's a mathematical fact which has little to do with geographical location of investors

I think there's a lot of ambiguity in valuation. P/E for a public company is very much a matter of confidence and perception.

Culturally, different groups will perceive a company in different ways. The same group will perceive similar companies differently. It's all over the map. In public markets things stabilize to a common view. That's the effect of liquidity. But private markets without that liquidity can have divergent investor perception.

Yeah except the biggest commodity market is in the Midwest.

You sound like you're from the East Coast.

And your sales aren't leading to profitability.

Maybe, but what is the slope of the curve?

Cool. Wanna take some equity off of T. Rowe's hands at the previous valuation?

Pre ipo Uber shares? Yes.

Costs are important too... Valuations are generally based on both.

If you haven't already, please read Matt Taibbi's Griftopia: http://www.amazon.com/gp/product/B003F3FJS2/ref=dp-kindle-re...

He covers the nitty gritty details on mortgage collapse in an approachable and enlightening fashion. His book lends weight to your assertion about coastal discord.

Thanks, i'll check ot out.

One epic failure and suddenly the entire discipline of investment banking, which moves mind-boggling amounts of money every day, is worthless?

How would you feel if you were a Dropbox employee right now

I'm a Dropbox employee. Yeah, it's not fun to see your valuation go down when equity is part of your compensation.

But I was previously an Amazon employee (also compensated in equity) and got to watch the stock value change on a daily basis. Sometimes it would pop after quarterly results, sometimes fall, but more than either of those it would change due to macroeconomic forces that were completely independent of the company's performance.

Setting aside the market forces outside our control, As a Dropbox employee I actually feel pretty good. We have a business model that is based on people paying us for value we create directly with our products and I'm excited about what's in the pipeline.

did you receive options or RSUs?

"not fun" is one thing. being underwater is something more than that I would think...

RSUs, both at Dropbox and Amazon. And yes, you're right that RSUs are better than options for that reason.

when did Dropbox switch from options to RSUs? i imagine some of the most tenured employees will be screwed...

"Boy I sure hope I negotiated a good salary instead of discounting it to take funny-money equity."

And so it begins

No paywall. Same content: https://www.morningstar.com/news/dow-jones/TDJNDN_2016041510...

Thank you. I'm starting to loathe all these WSJ links on HN because their new paywall is impossible to break and I have no intention of paying WSJ subscription since I read only few articles per month.

Google the headline and click through from the SERP. Sometimes you need to do it from an incognito window if they set a cookie.

Or click the "web" link under the post.

Goddam these people trying to earn money for their hard work!

I don't think that's the issue here. This is in many ways primarily a discussion site, and stories behind paywalls by definition limit the discussion to the users able to access it.

Ah yes, poor, poor Newscorp and poor Rupert Murdoch.

Ok, we changed to that from http://www.wsj.com/articles/t-rowe-price-marks-down-most-of-....

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