bubbles

A very interesting read indeed about recent research regarding bubble developments in the market by testing participants in scientific experiments reconstructing the South Sea Company bubble of 1720.
After the tulip mania in Amsterdam much earlier, probably one of the most iconic bubbles in history.


I took the liberty to insert some parallels to OBJ's story and its pump and dump history.


First of all, the recent pump for OBJ was conducted 4 years after the last one. That left ample time for a replenished shareholder base and fresh blood in the process which would not be reminded much of the bloodshed in 2010 when the bubble burst after ASIC induced notice that the GSK update contained nothing material.



The researchers found 4 main points which characterize a bubble.

1,
Uncertainty.

Uncertainty is a key factor in bubbles. Professor Lynn Stout, now at Cornell Law School, argues that stocks are more likely to end up overvalued where investors disagree more widely about the true valuation (not least because, if the sky is the limit, it raises the risks of betting against the stock).

Coming back to OBJ, uncertainty and nebulous language are the landmarks of OBJ udpates.
The latest ann is no exception as it does neither reveal the royalty figures nor the product names involved in the developments aimed for commercialisation.
In fact, commercialisation is only initially targeted.


2,
Leverage.

The second factor was leverage. In the South Sea Bubble, report the researchers, investors only had to put down the first 10% or 20% of the purchase price in the new subscription. These days we talk about margin debt: But anything which makes it easy to buy more assets than you can really afford, including derivatives, cheap debt, or a central banker walking around the financial district with a bucket, handing out money, would have the same affect.

OBJ conducted a CR just before the price was pushed higher and guaranteed the issue of new shares for directors which were consequently dumped once target was achieved.

Leverage was created as broker involvement was initiated prior to the news, allowing cheap accumulation, and milestones for share issuances to directors were met.

3,

Outsider buying insider selling.

The third factor was the outsiders buying and the insiders selling. As the stock in the South Sea Company went vertical, Londoners lined up around the block — literally and metaphorically — to participate in this and other IPOs. Meanwhile the original owners of the company were cashing in. Pretty much every bubble since has followed the same pattern. When you see the insiders selling and the outsiders buying, duck.


Baker was buying, outsiders, as in the broader market, did eventually do the heavy lifting while insiders now sell.


4,

Ignored mania.

And there was a fourth factor in the bubble that made me laugh out loud. Giusti and his colleagues have unearthed copies of pamphlets written during the South Sea Bubble proving that the stock was a mania — and which were roundly ignored. These pamphlets weren’t just written by a crank, either. Archibald Hutcheson was a member of Parliament. He issued a number of pamphlets, later on during the mania, in which he demonstrated mathematically that people were effectively paying $1,000 in the latest stock subscription for shares only worth $600.

And yet, no one paid him any attention. They carried on buying.

I leave the OBJ comparison to the informed reader...




Four ways to spot an investing bubble