After returning to China, I learned about the game "Real Money Fight Landlord". In this three-player card game, two players team up against one, which from a fairness perspective is extremely asymmetric. This is very similar to the modern enterprise model where capitalists, entrepreneurs, and equity investors form a trio that issues part of their stocks at high premiums to stock investors. After a year, the equity investment gradually exits, completing the entire investment process, restoring the peaceful coexistence between the owners and the managers within the company.
Equity investors' pursuit of "freedom" far exceeds their desire for profit. In choosing between profit maximization and liquidity premium, equity investors prefer liquidity while capitalists prefer profit maximization. Therefore, the card game "Fight Landlord" does not always result in winner-takes-all. After the company goes public, capitalists have the highest book asset premium, but due to lack of freedom, their asset premium fluctuates with the rise and fall of stock prices. Capitalists not only bear the operational risks of the company but also the trading risks of stocks. After equity investors exit, stock investors will come and go like a revolving door, and entrepreneurs can choose to leave perfectly after realizing their equity incentives. Only the capitalists do not have this freedom. In this round of "Fight Landlord", the losers are the capitalists because the company's pursuit of profit maximization is both an incentive and a shackle.
The development of a company has three stages: start-up, growth, and maturity. Equity investors can choose to enter during the start-up phase and exit during the growth phase, giving up the pursuit of profit for liquidity premium. This behavior pattern sometimes also infects capitalists, turning them into equity investors as well.
Definition of Bubble
The exit of equity investment involves trade-offs. After painstakingly nurturing a company for many years, choosing to exit at its most glorious stage means not taking away the company's profits or sharing in its future growth. This mindset can be expressed through rewriting a famous poem: "Profit is precious, growth more so, if for freedom's sake, both can be discarded." Here, "freedom" refers to the liquidity of capital, and the price for obtaining "freedom" is neither past profit nor future growth, but rather the liquidity premium the company receives after going public.
The liquidity premium of modern enterprises comes from the capital market. This premium is related to the company's profit but not linearly. The fact that the Growth Enterprise Market (GEM) opens with a sharp increase indicates that the premium a company gains after going public mainly stems from investors' irrational frenzy, as the growth premium represented by the company's profit has already been reflected in the issue price-to-earnings ratio. Neither stock investment nor equity investment is motivated by the profit motive of capitalists and entrepreneurs. Although their returns are premised on the company's sustainable growth, stock investors focus more on transactional premium while equity investors focus more on liquidity premium. I once mentioned that transaction value is the mainstream value of modern financial markets. So what is liquidity premium? It is a form of transaction value, which is commonly known as asset bubbles. If I were to define asset bubbles, it would be: liquidity premium generated based on expectations and transactions.
Saying No to Winner-Takes-All
If this is the first round of the game, the winners are ranked accordingly: the capitalists have the highest book premium, followed by equity investors, then entrepreneurs, and lastly stock investors who bear the transaction risk. However, from a liquidity perspective, equity investors exit at a premium and no longer bear the operational risks of the company.
Equity investors' pursuit of "freedom" far exceeds their desire for profit. In choosing between profit maximization and liquidity premium, equity investors prefer liquidity while capitalists prefer profit maximization. Therefore, the card game "Fight Landlord" does not always result in winner-takes-all. After the company goes public, capitalists have the highest book asset premium, but due to lack of freedom, their asset premium fluctuates with the rise and fall of stock prices. Capitalists not only bear the operational risks of the company but also the trading risks of stocks. After equity investors exit, stock investors will come and go like a revolving door, and entrepreneurs can choose to leave perfectly after realizing their equity incentives. Only the capitalists do not have this freedom. In this round of "Fight Landlord", the losers are the capitalists because the company's pursuit of profit maximization is both an incentive and a shackle.
The development of a company has three stages: start-up, growth, and maturity. Equity investors can choose to enter during the start-up phase and exit during the growth phase, giving up the pursuit of profit for liquidity premium. This behavior pattern sometimes also infects capitalists, turning them into equity investors as well. In this case, in the card game of modern enterprises, it is not winner-takes-all, and capitalists without "freedom" are likely to be shackled.
Forum Signature: Tie Xue Yuan Mo Shi San Da Li Xian Dou Di Zhu
Shenzhen Ultrasonic