The little jokule about the efficient markets hypothesis is that Eugene Fama got the Nobel for proving it, Lars Hansen for doing the maths, Robert Shiller for disproving it. The awards all being offered at the same time.
WeWork being an interesting exemplar of the point:
This was a business that reported a net loss of $1.6bn in 2018 on revenues of $1.8bn. Yet Softbank, in the last private funding round, had injected the last portion of its investment at a valuation of $47bn (£37bn). Baffled outsiders screamed that it made no financial sense, especially as bigger and profitable IWG was sitting around the £3bn mark, but Son went ahead.
He knows the price of his misjudgment now. In last week’s rescue deal, WeWork was valued at $8bn and Softbank had to throw in another $6.5bn in equity and debt to gain control. Neumann agreed to sell his shares and will walk away with roughly $1.7bn. It’s not hard to identify the winner and loser in that relationship.
Another winner is the reputation of public-market investors. Wall Street tends to love larger-than-life personalities pitching visions of global expansion and domination, but Neumann didn’t get off first base. WeWork went from publication of grand IPO prospectus to emergency rescue in two months. Gravity rarely reasserts itself so quickly in financial markets.
Recall what the EMH actually says – in a market all information is in prices. That is, markets are efficient at processing information.
OK, so, WeWork went from being something where only a few few – actually, really, only Son – determined the valuation, the price. As soon as it was exposed to the glare of market examination it folded. Markets did pretty efficiently process that information.
Points will be awarded for bringing our attention to pieces that argue WeWork is a failure of market capitalism. When, obviously enough, it’s a grand success of the process. Those markets divined the truth rather more quickly that a little committee of the righteous and expert, didn’t they?
It’s also a good example of Shiller’s caveat. It’s only when those with information can trade on it that it is incorporated into prices. Only when WeWork approached the public markets did reality affect the price….