Impact of Order Books

This has played out exactly as expected, perhaps barring one thing I’ll get to shortly.

That on-paper drop in portfolio values has been coming for months as discussed many times in State of the Market and the Live Blogs. 

It’s just the market playing catch up with opinion. Whilst Red Button sell prices have been free to move with collective trader opinion for months now, Blue Button prices have not. 

So we’ve had situations like Pogba for example who has been a “zombie” trade for months – nobody has thought he was worth £7+ for a long time now. That has been clear on the Red Button but it is only yesterday that the Blue Button was able to move to match. 

So the real valuation has been right there for everyone to see for a long time – it just hasn’t appeared in actual portfolio values due to an artificially high Blue Button price. That’s a shock for many.

Similar situations for Rashford, Grealish, Greenwood. A huge list of drops in players that aren’t much of a surprise. And of course Messi and this is exactly why taking those all or nothing 50/50 gambles is just a terrible idea as discussed here last week.

In the vast majority of cases the worst of these drops are falling on the players that deserve it. Holding too much Pogba or Greenwood at these prices in 2020 was just bad trading and holders will have to take that on the chin. 

As I said in Monday’s State of the Market – this is now a grown up market place with serious consequences of bad decisions. The kid gloves are off and some are going to struggle with that because they are used to getting away with room temperature IQ trading. But I think for those who do know what they are doing Order Books are a great thing.

So the brunt of this has been taken by holders of players they should have avoided. But there are also drops for plenty of players I would consider good value like Bruno Fernandes or Depay.

Two points on this. 

For a start pretty much every player was always going to take a hit on this – those prices were always coming back more towards the Red Button price.

So if they have taken a drop it’s not an automatic damning verdict on that player – it’s a natural consequence of a big systematic change in the backend. Most of the time a price change is a sign that opinion has changed – but in this particular one off event it’s because the structure of the market has been changed (for the better).

Secondly – collective trader opinion is often wrong. One of those main points I made earlier in the week was about the importance of trusting our own opinions on value and not getting swept along with social media opinion or be over influenced by short term reactions. 

I made this point in anticipation of exactly this situation. 

So if we are holding a player that has dropped significantly but we are optimistic on their chances in this new dividend structure we have very little to worry about that we didn’t before.

That player is going to have to prove they are worth it with results but if we have our Scouting right – they will more often than not. The art and science of good trading particularly over the opening 3 months of the season will be how quickly we can refine those selections based on good use of early match data.

We’ll take the best possible group of high potential players into the season. Because our selections are good, the bulk should end up doing quite well. For perhaps the 25-35% or so who struggle we’ll do our best to catch it as early as possible and redistribute that money towards the stronger picks.

And if maybe 10% of the time we make a mistake or hit bad luck? That’s in the budget of a good trader and no big deal.

So nothing has really changed on that.

The fundamental is this – even before this 100% dividend increase there was plenty of value available in this market. 

But we did get a 100% increase and the value is incredible now, often even in fairly obvious “Core” player sort of selections and even some Premiums. 

The really key thing to remember is the basic economics in play. There are huge yields available and it is not just likely but essentially inevitable that money will enter the market to take advantage of that value. 

The only thing that could prevent that is a general collapse of FI which I would think very unlikely – the company looks stronger every year and is well managed. I do as much due diligence as is possible including regularly credit checking Index Labs Ltd and to my eye they check out.

The second uncertainty is exactly who those players will be – who will return the highest yields and acheive the best prices because of course not all of them will rise. But that’s the whole point of this game and something I relish.

The One Surprising Thing and an Observation

At the top of the article I mentioned one thing that did surprise me about the switchover to Order Books. 

In State of the Market this week I had a minor conspiracy theory that FI might use their ability to sell shares combined with the Market Makers to soften the blow a bit, perhaps keeping Blue Button prices artifically high only to deflate them gradually over days or weeks.

As far as I can tell, they haven’t. Those drops really have been savage and no punches have been pulled. 

This is both good and bad. I wonder whether it would have been better to ease Blue Button prices down gradually rather than sending them tumbling. As whilst nothing has really changed in terms of value – it has shocked many – and sentiment does matter in markets.

On the other hand – it’s more honest. Part of the reason for the drop is not just Blue Button prices moving to meet Red – it’s just that our portfolios now display something much closer to what you can actually sell them for. (I’ll cover the new “mid-price” option another time it’s not an urgent thing – I personally will be sticking with the traditional buy price but there is no right or wrong answer on this). 

This is brave from FI. They have really ripped that plaster off. I don’t think I would have been quite that brave! 

It does however create a market that looks much more healthy objectively speaking. A trader who has just lost a significant chunk may find it hard to agree with that statement! But objectively, it’s true.

The spreads are much narrower now and this situation we have had throughout 2020 where we had these huge mismatches between Sell and Buy price was just wrong. Any serious person who knows markets would look at that and get nervous. But now? It looks like a sensible market.

 

The one thing we are missing is Market Depth information. Put simply, right now if I look at the price for say Cody Gakpo from yesterday’s article who is now at £1.32 or £1.46. We have no idea how sturdy those prices are. If I wanted to, as a single individual, I could drop his price to £1.10 right now just by Offering my shares for the lowest offer possible. (Hell will freeze but I could…) 

That would cause every holder of Gakpo to lose on paper value in their portfolio for as long as that offer remains on the table. Which in that case would not be for very long because you’d have to be very stupid to do that. 

When NASDAQ take over the back end we should get more information on exactly how much “depth” there is behind that price – i.e it will show that the average price is more like £1.46 and highlight that there happens to be one idiot offering £1.10. 

Where as now we have no idea. 

This leads to two additional thoughts. 

We’ve seen how fast prices can drop. We haven’t yet seen how fast they can rise. And it’s probably even faster than before. 

It used to be that moving a price would take dozens or hundreds of people buying or selling. Now it just takes one person to move a price. That should result in some pretty interesting market movements, for good or ill, as we get the season underway. 

FI is probably just big enough where it cope with an Order Book. In order to flatten out those volatile movements it will need more users so that one individual causes less of a splash. But we are still at a stage where a single big fish can move things around so that’s going to be interesting and we will need to be mentally resilient and sure of our selections so we don’t overreact to any short term price moves.

We may also see rapid and generous rewards when we get our selections right.

Another thing I’ll not go heavily into now but later – with more user control of prices comes far more opportunity for pumpers, trading groups or individual whales to screw with the market. 

As an extreme example let’s say we had a £500k+ portfolio holder who has spent time cultivating a social media trading group and he posted on Twitter that he thinks Cherki’s price will hit £7 by next weekend he could probably make that true all by himself just by placing bids. 

With the help of his trading group who will be tasked with flooding chat groups and twitter with the pump of the week, he could keep that going. And if unwitting fools follow that rise because they see it on the risers list… they could cash out on them. 

Then he will refer back to his Tweet saying he got the “prediction” correct. And then the next time he picks another player to predict a price rise for… unwitting people are more likely to believe him because “he was right about Cherki!”. 

This sort of thing will be happening already. And will likely get worse.

Pay even less attention than usual to the short term fluctations in prices because you can trust what you see even less now. 

We must trust in our own assessments of quality and real value more than ever. 

The only sustainable rises are going to come out of players that have genuine quality because the dividends will support those prices. Particularly now that the dividend rewards are so rich. 

What do we actually need to do?

I can make this one really simple. 

1) Relax and don’t let any on paper drop get to us. It happened to everyone, though it will have hit some harder than others. At a broad estimate, a 10% drop or less is probably a good result. 15% is probably ok. 20%+? It’s probably getting very questionable what that trader was holding and how their portfolio was structured.

But bear in mind these “drops” are often very misleading. For example any cheap bids I’ve bought recently were obviously bought at red button price and INSTANTLY gave me an on paper profit because it showed the Blue Button price which was often 20-30% higher. That false profit has gone – yet the pick up at the low bid price was still value. Things like this have to be borne in mind.

In fact, the more value you picked up on bids – the worse your on paper hit may actually be

It is actually possible that someone who took a 20-30% on paper hit is actually doing brilliantly because they have picked up a lot of value. 

What I’d be really concerned about is people persisting in holding large numbers of obviously overpriced players like Pogba or Greenwood.

What’s important is whether that player is value at whatever price you paid. 

2) Decide if you really have any obvious mistakes or not. If you remain confident in the quality of that player and have a genuine reason why that player is going to perform well in future? You have very little to stress about other than the usual management of a portfolio. 

If however you have made a real mistake and you are holding a dud that has no real prospect of recovery? You may have to take that on the chin and move on. Learn whatever lesson that needs to be learned and put that money somewhere that is better value. 

It can be painful taking a hit however sitting on no hoper players is a dead end. With lots of value available in the market at the moment – if you have to take 20-30% hits on a no hoper you can probably also get a 20-30% discount on something that is good value in this market. So it’s generally better to make the switch to something you are confident in in that scenario.

3) If you were confident in your holds yesterday morning – nothing has actually changed. The only sensible thing to do is continue calmly preparing a portfolio for the season as we have been doing now for weeks and months.

4) There is one trap I’d be wary of. Sometimes in times of uncertainty people tend to cluster up in what are considered “popular” players thinking they are safe havens. People are also quite easily led when they are uncertain so it’s a prime time for social media pumpers.

I’d draw attention again to the analysis of the pre-season results from last year where it was often the most “popular” and therefore highly priced players that ended up performing the worst – especially if they have limited ability to back up that price tag.

I think many people are feeling uncertain and vulnerable and will therefore be drawn into some of those comfort blanket picks. This is likely to be an error and it’s something we really want to avoid. It may appear to work early on but once that weakness is exposed the price drop can come very swiftly now.

Final Thought

We have possibly the best basis for trading ahead of us that I can ever remember. And I include even the very early days of FI on that.

Whilst the early days were obviously a great time to invest in hindsight it was also much higher risk a few years ago. The company was less established and it was an unproven concept. But now it is established and is becoming a well recognised product that should continue to grow.

Because we’ve had this whopping dividend increase the genuine value is definitely there. And Order Books give good traders more opportunities to profit than ever before.

I am incredibly optimistic for this season. And regular readers will know I’m not someone who is constantly positive for no reason. I’m optimistic because there is just so much genuine value in this market and that is not going to just be left sitting there. People like money.

But this transition to Order Books, whilst great for the longer term health of the product, has no doubt been a shock and it’s going to take some getting over for many. 

We are getting a short term bump as expected. But I would expect that over the weeks and months to come as those fat dividends roll in… this transition to Order Books will be forgotten about before too long. 

Have a good weekend. I’ll be back on Sunday with some Scouting highlights with the full weekend Scouting update coming on Monday as usual. 

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