Pricing: repeated game between investors and companies

1、 Investment and financing decisions are two sides of the same coin

Mr. Buffett once said:

I'm a good investor because I'm a good entrepreneur. And I'm also a good entrepreneur because I'm a good investor.

You will find that investor decision and corporate decision are two sides of the same coin. This is just like we buy vegetables in the market. Vegetable farmers are sellers, we are buyers, and we trade with vegetables. So the logic is the same when it comes to the capital market. You can imagine that investors are buyers and companies are sellers, but we are buying and selling a special commodity. What is it? It is the future growth of an enterprise. And enterprises sell their future growth into bonds, stocks, asset securitization and other financial products through financial instruments, which is the capital market. When the enterprise sells out, we decide whether to buy it or not and spend how much money to buy it.

How is this market different from other markets?

This market has a very special place, that is, the commodity it trades is the future growth of the enterprise. This commodity is totally different from the commodity in our traditional concept. It has two characteristics. First, it's a virtual product. What you are trading in is the future growth of the product, it's invisible and intangible; second, the product is endogenous and uncertain. This future growth will determine the future wealth of enterprises, companies and investors, and the expectation of growth will determine the wishes of investors.Thus affecting the future growth of enterprises. This is an endogenous cycle relationship, and the expectation about the future is uncertain, so it is endogenous and uncertain.

Therefore, such a virtual product with endogenous and uncertainty constructs a complex, multi-dimensional and uncertain market. It is because of this feature that it has a very complex impact on both sides of a coin, that is, individual investors and companies.

2、 Pricing is a repeated game between investors and companies

It is easy for us to understand that if a market can be formed, it needs to be able to "buy and sell", that is, transactions can be concluded. What is the core of the deal? It's that you can agree on the price, apple, pear and financial products are the same.

The difference is that financial products are virtual products. After you buy them, they are not used to meet the current consumption, but for future consumption, that is to say, they are investment.

There is also a problem. It does not belong to you alone. Although you have the ownership of this product in theory, the product belongs to many people, because an enterprise belongs to many people. So, you don't have control. What does that mean? What investors pay attention to is not the right to use the product, but the uncertainty of their own future, and how much return I should have in the future if I undertake this uncertainty. This is the risk and benefit of investment decision.

So, to determine the price of a company, what should investors first determine? The first step is to determine the risk of the company.

Risk is not a static concept at all. You and your counterparties, every decision is closely related. For example, what kind of financing structure will affect the risk of the company. If the debt ratio is high, the risk of bankruptcy will be increased; if stocks are used, there will be a risk of governance; moreover, whether the enterprise will pay dividends, what method will be used to pay dividends, whether or not to do merger and acquisition, and what method will be used for merger and acquisition Will affect the company's cash flow and future growth.

As an investor, the risks and benefits you take into account in your decision-making are actually the result of the company's decision-making.

In turn, decisions about whether to buy or how much to buy will enter the price, and then the price will affect the company's decision-making, which is called feedback mechanism.

Therefore, in the financial market, a feedback mechanism is formed around pricing, and then it connects the investors' decision-making and the company's decision-making into a repeated game. The change of asset price between the games, that is, pricing, is the core.

Therefore, in the process of this game, you will be particularly deeply aware of the two sides of the integration of investor decision-making and corporate decision-making.

For example, in September 2018, Unicorn (meituan) was listed in Hong Kong. From the perspective of Wang Xing (CEO of meituan) and meituan, what is the performance of meituan, how is its growth rate, what is the debt ratio, what is the equity structure, what is the power structure in the board of directors, how many shares are sold out, when and what do these decisions have to do with it? These decisions are closely related to what price to sell. From the perspective of market investors, you get to know the information through meituan's information disclosure or research reports, and then make a decision on whether to buy or how much to buy. Therefore, your decision has finally entered the market price of meituan.

This process is not over. Now you have bought meituan's shares and become a shareholder of meituan. You begin to pay attention to Wang Xing's every move, the fluctuation of meituan's share price, calculate how much money you can make on meituan and judge whether the investment is worthwhile and at what point to sell.

In order to make these decisions, you should pay attention to the rise and fall of the market, the trend of takeout industry, the size of meituan and the turnover rate.

You will also consider when to build a warehouse and ship goods. What's more, after thinking about it, you decide that you can't put all your eggs in one basket. You should buy more stocks and hedge with meituan.

Suppose you are not a retail investor, you are an institutional investor in Chinese mainland. You have to consider the Hongkong market and the Chinese mainland market are separated. Is there any obstacle to capital flow? How much is the charge? This is the impact of market segmentation on investors' decision-making.

You also need to consider, for example, if there is any rash in the takeout industry and where there is external impact, many investors will withdraw funds on meituan, which will lead to their passivity. This is the run on the fund.

In fact, the content of investors' decision-making is an important link in the pricing game. Investors keep a close eye on meituan's stock price fluctuation step by step, then analyze all kinds of information, make their own judgment on meituan's future growth, and then make decisions.

Where does the information come from? In addition to macro information and industry information, the most important information is the enterprise itself. And what is the information of the enterprise itself? What the enterprise information conveys is actually the decision-making of the enterprise itself.

For example, whether meituan will issue additional shares, whether it will pay dividends, how it will pay dividends, whether its financial statements are detailed, whether there are plans for merger and acquisition, and whether the members of the board of directors have changed The decisions of these companies not only tell you the current situation of meituan, but also let us judge and understand the future of the company.

Around the price changes of meituan, a feedback mechanism has been formed, which makes investors' decision-making and company's decision-making into a dynamic, long-term repeated game. The core of this game is pricing.

Therefore, almost all investors' and companies' decisions are based on pricing.

In the discussion just now, I made an implicit assumption that we investors and the management of the company are completely rational. First, we have no human weakness, no greed, no fear. Second, we are not influenced by others and make our own judgments independently. In addition, we also assume that the interests of the company's management and minority shareholders are completely consistent and do not need any constraints. Therefore, we assume that the market is a spontaneous state, which adjusts by its own strength. Do you think that's true?

It's not obvious in the real world. Like the weakness of human nature, the external supervision will affect the pricing and the direction of the game.

Although the capital market is the same as other markets, the pricing process becomes very special because of its endogenous and uncertainty. For example, what does pricing for future growth depend on? It's up to you to believe and judge how much it's worth and your judgment will be influenced by the signals from the company. This is a market full of subjective judgment, subjective expectation and information game. Because of this, there are two other factors that will play a role in the pricing process. One is to affect our expected emotions, namely anxiety, fear and greed; the other is the transaction system arrangement designed to reduce uncertainty, that is, regulation.