Perception, timing and efficiency

Perception and timing are forever interlinked in market valuations, which can drive and are driven by liquidity. Circularly this comes back again to timing and perception. That which cannot be escaped.

Perception: A seller of an asset, for example, might feel its value to be 2x +1, where x is some operating or financial metric, the multiple implies its future growth potential, and there is an added premium because the asset is perceived as scarce and special. The buyer disagrees and would pay x, best and final.

Timing: For a variety of reasons, the noted seller argues that it’s justified to accelerate value realization. The buyer does not see it the same way (or maybe can’t) and would defer that value transfer, or, if possible and better still, eliminate it altogether. The buyer would rather wait for proof of how it all plays out, the seller wants to lock it in.

In this way of seeing things, the asset’s liquidity will increase with the narrowing of timing and perception gaps. And liquidity itself may facilitate that narrowing. When money and resources are abundant, for the buyer or seller, either way, and when the choice of assets is diverse, there is a greater chance than not that some deal will clear the market. Conversely, when liquidity is thin, the gaps are much more difficult to bridge, and assets are more difficult to value in the absence of transaction evidence – which may circularly lead to illiquidity, as alluded.

That second case is referred to as market inefficiency by some, implying that the first case is efficient. What is or isn’t so, however, may more correctly be assessed by individual objective. When buyers and sellers all perfectly agree on timing and perception, there is no value realization opportunity for either side, though by conventional accounts that is a perfectly efficient market.

It’s good to disagree, it’s good for markets to be analytically (as opposed to operationally) inefficient. Timing and perception gaps drive risk, which leads to opportunity. The risk is in this case a healthy variety. The absence of a gap, by the same token, may lead to a collective shocks in unison, which is a different kind of risk entirely.

Alternative asset classes, which tend to be less liquid, are an interesting case.