Fred Wilson
submits:
Yesterday the stock market dropped almost 1,000 points intraday
before rebounding late in the day. Does this matter to the world of
entrepreneurship and startups? Yes and No.
I'm no expert in the stock market but I read a bunch of experts
blogs. I liked this from
Steve Place
:
High Frequency Trading broke, then saved the market
This will probably be the most controversial thing I'll
say. Quant firms have been keeping the market in a fairly low
volatility state as they seek mean reversion and arbitrage
strategies. By doing this they provide liquidity in the market
for institutional players and funds. Their risk models are
based on statistical distributions, behavioral finance, and
other voodoo. When these models go out of wack, they can
exacerbate the situation- that did occur in 2008 when liquidity
dropped out of the system.
However, I feel that program trading (eventually) provided
the liquidity for the snapback of this rally. If it weren't for
quants betting on extreme mean reversion, we would have held a
much deeper selloff comparable to 1987. What evidence do I have
of this? The sheer snapback of the price in such a short amount
of time. It certainly wasn't fundamental traders who all of a
sudden found "value" in the market with a trailing P/E. The
only sort of quick analysis that provides that kind of price
action are done by non-humans at quantitative firms, and they
saved the market from something much, much worse.
What Steve is saying is that computer driven trading drove the
plunge and then drove the rebound. It was not human trading stocks
that caused the price action. It was machines that had been
programmed by humans.
There's a lot of talk about machine to machine interaction
coming into our lives. Yesterday afternoon at 2:45pm, we saw what
that looks like. For the people who make their living trading in
these markets, it was a sick feeling in their stomachs. For the
rest of us, I don't think this is too much of a big deal.
However, there are some big issues in the capital markets right
now. From the bottom last April to the top a few weeks ago, the
S&P 500 was up about 70% in a year. It was close to getting
back to its pre meltdown high. Maybe the markets came back too far
too fast. It's not like we are past all of our problems.
Money is cheap, too cheap. You can't get a yield anywhere. As
my friend Howard points out
, junk bonds trade at 8%. Money is going to get more expensive
soon. And that will not be good for the stock markets.
And then there's the coming regulation of banks and brokers,
which will likely put pressure on the stock markets.
So what does matter to the world of entrepreneurs and startups
is that stock markets may not have much more room to go up. I've
been thinking that we are in for a long period of low public equity
returns. I have no idea when that will happen but the macro
environment just doesn't look that great to me.
That doesn't mean that you can't make money with your startup
and it doesn't mean that you can't make money in venture capital.
The returns in startup land come mostly from taking nothing and
turning it into something. If you take hard work, sweat equity, and
a few million bucks of startup capital and turn that into a
business producing $5mm a year of cash flow, then that is value
creation of the old fashioned kind and it will work in any market
environment.
But it also means to me that we should not be banking our
business on the IPO exit. The public markets are a fickle thing.
And it looks like machines are running that show now. I'm more
optimistic about institutions turning to the private markets where
capital is still traded by humans. I believe the secondary market
where institutional private capital comes into the cap tables of
startups and provides liquidity to founders, angels, and early
stage investors is the next big thing for liquidity in the startup
business and I am pleased to see that market continue to develop
nicely.
So I don't think the "crash of 2:45pm" as
our friends from StockTwits are calling it
matters much to those of us working in the world of startups, but
it may be indicative of things to come (as markets tend to be) and
it is worth figuring that part out.
See also
A Stunning Trend in Home Equity
on seekingalpha.com