Second Life Stock Market

Thank you for a shining example of a refuting argument. With rhetorical skills like that, you should have no problems at all on the playground.
So if I'm understanding you, you've found an investment scheme that has existed for a little more than a week and has yielded you 20,000% return (annualized) and it is NOT a Ponzi scheme?

I have a bridge on the Hudson, would you be interested in buying it? Better still, I can let you in on the IPO and you could make zillions (nudge, nudge, wink, wink).

First of all I would like to say I originally posted this thread in the Residents Answers forum, it has been moved to this forum, and i have no problem with that and respect Linden Labs decision.

The next comment I would make is to point you to a link here that has been published today by Wall Street technology

http://www.wallstreetandtech.com/blog/archives/2007/03/virtual_stock_e.html
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I would apologise for the poor Google link, here are two separate sources that explain the concept of the Macmillan Gap

http://www.dti.gov.uk/ministers/speeches/hewitt301002.html

(quote from speech)

Closing the Equity Gap – improving access to finance

The second theme I want to cover is how we are working to improve access to finance - closing the equity gap.

The equity gap is not a new phenomenon The "Macmillan" gap was first identified in 1931 – and led to the creation of 3i. The size and nature of the gap though has probably changed over time and is still the subject of much debate.

If we are to close the productivity gap, companies must have access to the finance they need to reach their full potential.

In an ideal world, there would be a seamless stream of funding for each stage of a company's development. From start–up to growth stage to successful global company. Provided that the business proposition being put forward is sound and viable.

But it's not an ideal world. And the fact is that finance is not always readily available throughout the business cycle.

I want all companies to be able to reach their full potential. But the issues are different at different stages – and we are recognising this in the way we are tackling it.

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Next link

http://english.people.com.cn/200509/09/eng20050909_207496.html

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Should be enough base material there for you all to do some research but the core of the argument is that to obtain equity finance to start a business can be quite hard below a certain level, simply because there is not enough money being loaned to make it worthwhile for the lending industry, and in many cases a lack of security for the loan.

This is where venture finance came in via the start up business now known as 3i the Investment Trust now quoted in the LSE. Essentially it took equity stakes in small businesses, the formation of this company was inspired by Harold Macmillan the UK Prime Minster.

Essentially this bridged a gap in business start up finance that was somewhere between a stock market listing and private finance.

Let me offer some comments about business finance within Second Life that a poster raised

I agree some concepts require very little money; lots of spare time, and in most cases do not really pay off.

But...lets look at some working examples of successful businesses in Second Life that ARE profitable AND needed reasonable financial resource to get it off the ground.

The first example is perhaps the Caledon Sims. Today there are around 11 full Sims and 4 void sims. We can all do the sums on the capital invested and the monthly tier outlay. I will not discuss Desmond’s day to day business but I hope he will not mind me saying it is profitable and viable.

The next example is perhaps the Gold Rush casinos within Second Life (and others of their ilk) While I agree the land cost just might be affordable for Joe Six Pack or Jack on the London tube, the simple fact of the matter is that a casino represents REAL risk due to large payout prizes of a million lindens or more, AND the costs of staff, equipment, and graphic design.

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Finally a comment about risk. I agree the WSE IS a risk investment in itself. But.....there is no harm in speculating a fw hundred real dollars or so in terms of picking out a potential winner providing you can aford to lose. That IS the nature of equity investment

It is certainly both. To put it in perspective, for fun I earmarked some of Caledon's income to pay my mortgage which it is doing nicely, even after taxes. I have 'first life' income certainly, but it just tickled me to have the intangible and whimsical cover such a basic thing.

However, *because* I'm doing okay I have no need for more investment capital. I get one or two IM's from people wanting to 'invest' in me, no questions asked, every week. I don't bite; I simply don't need their money and don't care to exceed a rational growth rate (yes, I managed to figure that out without an MBA).

* * * * *

I'm the first to cry foul when it comes to investment scams and schemes - and yes, I'm *highly* doubtful of certain elements of this 'stock market'. Darius says it far better than I.

More than that, I can see a situation where the stock market effort itself is genuine, but someone could create a "public offering" that is, in itself, nothing more than a scam. Or be too foolish to realise that their business idea was completely untenable in the first place.

Sometimes the line between 'investment' and 'scam' gets thin. Some of our most common financial practises were born in this murky zone:

Shares trading: http://en.wikipedia.org/wiki/South_sea_bubble, http://en.wikipedia.org/wiki/Mississippi_Scheme

Paper money: http://en.wikipedia.org/wiki/Stockholms_Banco

So the question is this: Can this exchange soon satisfy Darius' questions and eventually legitimise itself, or risk becoming nice window dressing for Ponzi scheme operations?

No matter what happens, the success or failure of the stocks will stick to the reputation of the exchange itself.

Yes I agree about the Exchange itself Desmond (and all other posters) The two things that tempted me to have a punt was (1) the owner of the Exchange is now very much in the first life media and (2) the involvement of quite a few avatars including Shaun (he has been around for some time.

But DON'T speculate more than you can afford to LOOSE (without any regrets at all)

Finally I also agree it is an almost absolute certainty some of the listed and/or IPO’s will fail in one way or another, either by bad chance/luck, or because of "other reasons"

So remember asset allocation and spread your money around a bit. There is no min holdings at present and the Second Life Linden dollar (270:1 real US) does allow for very modest punts. To put that in context I met somebody who has had a punt with $10 real US, I cannot see that can do any real harm, but just could pay off very well indeed

All views welcome and I certainly will respect those views

No, in real equity investment, loss is not guaranteed. At WSE loss for some - the late comers - is guaranteed.

I looked at your site; cute prospectuses. They pretend to provide information but there is no substantiation and often no information. I was impressed by:this for a "firm" that has supposedly raised L$111,000,000 through their WSE "IPO".

So no verification, no collateral, no oversight, no regulation, no enforcement, no recourse. As far as I can tell, to be "listed" on WSE requires that I write a few paragraphs and then free money for me. Woot!

Just as SL cars are "toy cars", WSE is a "toy market". To each their own fun, I suppose. The disclaimer "For Entertainment Purposes Only" might save you some headaches down the road.

I take your point. In fact to push things out a little further "most" penny shares are doomed to failure. After all there is a reason why they are penny shares in the first place, chuckle. But now and again penny shares boom beyond all expectations. For example I well remember Lastminute.Com (LMC), at one time you could have purchased shares in the company at 20p each, debt ridden and perhaps the last of the dot.com survivors, nobody thought it would make it back in 2001, hence the price. However times changed as it climbed to more than £3.00 per share within the space of around 18 months before being took over. Hence the reason why perfectly sane investors do speculate in penny shares and rank outsiders.

Also I do understand the concept of portfolio construction and asset allocation; after all it is my real life business. The investments I have in the WSE are spread sufficiently enough so that in most normal cases if the market prospers then so should I. If it does not work, that is the whole concept of equity investments in Second Life are doomed to fail then so be it.

I also totally agree that the integrity of the WSE itself in terms of acting and behaving like the first life equivalent cannot be underlined enough. But as I said before a large number of avatars are involved in the operation and if any equity type business could prosper in Second Life this could be the one. In terms of rule enforcement, principal based financial services legislation is not a million miles away from how the UK financial services industry works. Again, I know this because it is my day job.

On the point of principal based rules, within Second Life every single Island owner who rents out land is dependent on that concept as they have more or less total control over their renting avatars, unlike the mainland that is administered by Linden Labs. So again it is not a brand new concept within Second Life

Finally if in first life I had a client who wanted to speculate with a few hundred pounds on some rank outsiders, and if they can easily afford to loose it without a moments regret, within the context of a portfolio worth multiples of tens of thousands of pounds I would not gainsay the principal of such an action. In fact it is quite common.

Quite prepared to talk to you about it in world. Look me up; I am based in Caledon Cay

Regards

John

Please allow me to introduce my good friend, the Minister of Finance from Nigeria.

I thought he had died - that woman who emailed me claiming to be his widow and offering me thousands of dollars can't be lying!

I have trouble wrapping my mind around this concept. There aren't real world controls on this market. The vast majority of these business don't run like real world businesses - and everyone is dependent on Linden Labs to keep things going in the end. I suppose if some people find this sort of thing fun, and don't put a whole lot of cash into it, yippee for them, but it's not something I'd want to be involved in. There is a great deal of potential for abuse.

Yes there is that risk; however the ability to move reasonably larger sums of money into and out of Second Life is controlled (to a degree) by Linden Labs. Of course there is always room for scams, that is nothing new in Second as well as first life. Cue Euron, Worldcom and a host of other first life companies too countless to mention.

Where I am coming from on this one is very simple. Many of us pay Linden Labs directly or indirectly tier payments each month to use virtual land, and some of us purchase Lindens to use in game for various reasons.

Ever since I discovered SL I have been told this is a platform rather than that of a game.

1) So my point is this, can this particular platform be used for anything else rather than that of pure entertainment, that is where we leave first life and enter Second Life and there is virtually no CONNECTION between the two?

2) Or is this platform something that enables first or real life commerce in one way or another and is it worthwhile for people such as myself (who have very little interest in role playing) in entering Second Life and using it for this reason?

If the answer is (1) then apart from the odd scripter, virtual artist, land or sim flipper on risky margins, and the rather risky business of middlemen/women avatars sub-leasing virtual land from Linden and letting it on, there is no real business potential here for people such as myself. Brand awareness is currently something I cannot define in my own business and it would not be worthwhile staying here for that reason alone. In other words commerce in SL is more or less limited to GAME related products and services only, apart from the very rare exception that "Ports" such as slingo.

Or if the answer is (2) then the sky is the potential limit.

This virtual stock market will go a very long way indeed in giving me some answers, its success will invite potential and its failure will tell me first life real commerce (outside of pure game related goods and services) will never really work in virtual self regulated worlds.

Its worth a few hundred pounds to find out in my own opinion.

Regards

John

The "platform" designation is just a marketing term that means "we think we are something other than a game and want you to as well".

I suspect that you know this already, but since the birth of commerce, contract enforcability has been a necessary component to functioning trade, even when commerce was barter of livestock and enforcement was rocks. SL lacks enforcement of anything and you haven't even the tool of communal shame to lean upon as identity is imaginary as well. I'd read an analysis of this topic in The Most Influential Blog in the Galaxy a year or so ago and I think it still holds true.

As a gamble of a "few hundred pounds", I certainly hope it works out for you and other participants. If it does, you'll probably be able to re-write Adam Smith (which should grant you very significant reutrn on investment).

Yes, I do not disagree, you are quite right. Contact enforcement is the heart of the issue.

Linden Labs CANNOT enforce individual avatar agreements. They only enforce mainland land sales and purchases, LindeX currency, and in some exceptional cases try to maintain grid order via community standards.

What I would like to find out is do avatars EN-MASS have a sense of honour and justice without external constraints. In my time in SL I have found evidence on both sides of the book, both for and against. The same in first life

I could go on about this in depth but RL calls now. Suffice to say it is the key that will either empower mass SL take up as a platform, OR define it as a pure pleasure pastime similar to WoW etc but with no real relevance to first life commerce beyond that of “brand concept”

I will let others have a go now, views welcomed as always

Regards

John

Just as an update on progress to date (and as there have been no further posts) the WSE had its own version of a black Monday yesterday, caused in the main by the departure of one of the key WSE board members and the possible decision to dump stocks.

Around 30% of market capital has been eroded and my own knowledge of first life markets tells me there might possibly be more selling to come. However the extreme weakness of the order book also tells me it is almost impossible for more substantial selling to occur quickly IF the original stock holders want anything like a decent price for their shares, rather than Linden cents on the dollar.

The only partial exceptions to the general rout at present are the gaming related stocks.

I think the entire concept of a stock market within Second Life is receiving its first real test.

And I said in an earlier post here on this thread the theme of Second Life as a platform, rather than that of a role playing game, is being tested under fire now for perhaps the first time since 2003. Regardless of what the Linden Labs marketing department and advertising agencies tell us. This whole concept is quite a fascinating real time experiment in virtual worlds

In short if people believe Second Life is an enabling platform, buyers will step in at some point to pick up what is perceived as value in the hope of future dividends and asset appreciation.

If on the other hand the overwhelming perception of Second Life is that of a game, with of course the very short-term attention span people have in those circumstances, then sooner or later stocks will be dumped at any price at all as nobody will have confidence in anybody else’s promises. It will be impossible to manage the panic.

Mmmmm... Don't be shy John, what happened?

I haven't been following this very closely, as I've had a lot else going on.

Perhaps you can post specifics at secondcitizen.com forums?

http://slnn.com/article/wse-eladrienne/

Edit: Adam Reuters also reported this:
http://secondlife.reuters.com/stories/2007/03/19/hope-capital-shares-plunge-amid-altman-sell-off/

Thanks for that link Something.

Have always been a bit chary about naming avatars on these BBs where more sensitive situations can apply, but I presume as it is now in the public domain LL may tolerate it.

However if this WSE takes off or goes into a rapid decline I can also see there may be a degree of share ramping/deramping and/or of mud slinging by some parties, so here if I post it will be very general comments only.

As Desmond Chang posted, the second forum site is run on an external website, it also appears that the Ginko Bank forum is prepared to allow general stock market type posts. It may be more appropriate to post there in the absence of clear-cut guidance from the forum moderator and/or Linden Labs

Can I conclude this post by saying again this whole WSE concept is highly experimental, potential investors should only punt with money they are absolutely prepared to loose, and without any regrets at all. I would hate to see someone get badly hurt

Regards

John

As a weekly update to the current state of the market I can report that things seem to have stabilised and some selective buying is starting, indeed the WSE as a whole is mirroring the usual action of a first life stock market.

More to the point there is some genuine decent depth to some selective shares on the order book at the time of this post, that is quite important as the WSE gives all members the ability to write/post trades both sides of the book this clearly indicates some people are prepared to buy reasonable quantity of stock at what they believe to be fair value.

Applying my own first life knowledge to this market I can see that there are two distinct classes of businesses that DO have a need to raise reasonably substantial sums of money to run a fairly profitable business, and that getting back to my earlier point about the Macmillan Gap would see the WSE as a valuable source of venture finance.

These are the land business, that is a business wishing to derive a worthwhile income from renting private Sims, and the Casino and gaming business where reasonably substantial floats of money are needed to support big prizes.

In the former case I calculate that 40 odd Sims would be the starting point where a worthwhile first life income could be generated, at a gross profit margin of say $100 to $200 per sim per month. The start up capital needed there is at least $30,000 real US dollars, assuming the CEO holds on to a substantial block of shares to maintain overall control of the company.

With the casino and gaming business I would have thought you needed to offer worthwhile top prizes, for example I see some casinos on the grid offer top payouts in excess of $L1, 000,000. In US dollars that is nearly $4,000 US per prize. I think that any properly run casino would need to be capitalised to be able to stand such payments. I would think $L5 to SL 10 million Lindens would be a starting point. Again $20 to $30K real US.

I think anyone who read this would agree such figures are in excess of the usual credit card limits for ordinary folk. Very definably venture finance, equity, or business loan territory. That is PERHAPS where the WSE could return equity and profit for ordinary avatars taking a very very modest punt on a pure total risk capital basis. It must be stated a degree of trust in both the Exchange and the quoted companies is necessary

There are several land and casino businesses quoted on the WSE, we will see how they fare AND if they honour promises to investors running their businesses with integrity

Finally in a week where I hear that Anshe Chung may have sold 10% of her business to a venture finance company, and the entry onto the grid of a real life Estate Agency buying multiple Sims to rent out, it would be nice to think others could benefit in a more modest way.

Views welcomed as always, will post back at the end of next week.

Regards

John

30k USD would get you 30k/1675 = 17.91 private islands (call it 17).

With the first tier payment of 5015 USD for all 17 due in 30 days.

So presuming you had say, 16 residents per sim (a remarkably low number) you would need 16 residents x 17 sims = 272 residents to fill up the sims.

In today's market sims should run about 60% full to be at breakeven tier, so you'd need about 163 people to reach breakeven.

Not easy to do in 30 days. More like a 90 day+ project.

So: either buy less sims to start, or have reserve capital: more like 40k than 30k USD to get started, and be prepared to work your tail off if you want the sims to be a nice place and attract the remainder of the residents needed.

Note that also, you'll have to return something nice to your investors in a reasonably timely manner, or give them long term equity positions. This is precisely why I've stayed private.

Not saying this can't be done, it sure can - it's just a difficult proposition. On scales of say, 50-100k USD, with money injected at key 'milestones' for intelligent expansion and management, it would certainly work.

The only drawback may be the 'trust gap' - that's a lot of money to invest with anyone you didn't know *extremely* well.

Agreed, handing over $1,650 US per Sim to another person sight unseen is not good business

But...several thousand people punting say anything from $L100 to $L50, 000 is slightly different Desmond. I might worry about $1,650 US real but would have far less concern over say $L25, 000 Linden dollars, especially if the avatar concerned had a good in world business you could virtually touch and see

The rest of your figures I do not dispute, after all you are in the real estate business in SL, with ME as one of your clients.

However just as an add on to your post the way I see it maturing from a land company viewpoint is much as you say, initial capital with tier reserve, that might give some comfort to potential new residents.

The landowner would retain say 51% of the outstanding shares to give him or her overall control BUT would write into the company articles of association a protection clause to prevent share asset dilution.

Then after say a set period you would commit to paying regular monthly dividends with say a two month delay clause, in other words dividends today would be based on rents collected two months ago.

The dividends paid out would of course be 49% of the gross profit minus either a salary or a management fee at a set percentage, in other words fairly transparent.

Potentially both parties to the deal could benefit, the landowner from a gearing viewpoint, and the shareholders from a investment and dividend viewpoint, in what amounts to a quite capital intensive Second Life business but with a proven SL business model to date.

Finally this collective investment vehicle could offer protection if Linden Labs change their business model insomuch as allowing avatar owned servers, because you may have access to further capital raising to fund the purchase and hosting of same.

Lots of fine detail to work out but as I said I am sure it can be done

Not being one to patronize casinos (just not my thing) and based on many postings here, the way that some SL casinos handle such large payouts is by not paying them out. For a machine to be able to pay a player L$1M, the machine owner would have to have that in their wallet. There have been multiple complaints about casinos not making good on large payouts. Another way for SL casinos to advertise L$1M payouts is for them to advertise them but have no machine that ever actually yields such a payout; unlike in Vegas, there is no oversight board.

Incidentally, your candor about your "black Monday" was rare and refreshing. It has considerably raised my view of your venture (for which that and L$5 will get you a prim ).

I'm enjoying watching a few bucks multiply into a few more....I feel that at the pace that the WSE is growing you'd be iggnorant not to speculate a little, this will allow those ideas that have been tossed around to actually have a chance of getting off the ground, some of those ideas are just way too much for 1 person to handle, finacially and decisevly, I strongly believe that the WSE will lead to a revolution in SL as far as commerce and its lending to the development of the world..., of course I'm using money that I can afford to lose

I have read on SLNN.com that a exchnage is coming BACK to town, Virtual Commerce exchnage is re-establishing itself as Virtual Comex under new management, which also boast's an insurance and regulatory commission that will provide IPO insurance against fraud to investors not only that but get this, auditable financial reports, disclosure to investors, and no trading of closely held shares for a minimum of 60 days.


What do you guys think... is this system poised for success, with about 200 investors it seem's that they are attempting to challenge WSE at becoming the financial hub of SL.


What are your thoughts

An exchange cannot have its own regulatory commission -- they must be entirely separate. Again, why not just invest in RL stock markets?

I do what I do as a hobby, but have yet to find anything that beats it.

The only thing holding me back financially, is... myself. Because I intend to survive the hyping of the grid.

Why not if you don't mind me asking? I do invest in RL but why avoid investing in SL if I can afford to, especially if that money being used is set aside for SL specifically? Again its what you can afford to lose, I'm not trying to get rich, I partake in practically everything else SL has to offer why not it's financial markets (providing that it remains stable)?

Holding you back from doing what exactly? What do you believe will happen as a result of "hyping of the grid" and how exactly do you intend on surviving? My apologies if I sound sarcastic I simply like to know the point of view of others, what do you forsee happening in the near future and what do you think this new exchange Virtual Comex is going to do to the situation?