Discover more from Buy the Rumor; Sell the News
I recently saw two articles about insiders selling out, in two very different industries. And it occurred to me that news of insiders selling their assets, especially in illiquid private markets, is often a sign of asset values having peaked. The two stories are about IP rights to music and sports teams.
Music and sports seems like two very different asset classes, but fundamentally these are the same kind of asset: they’re illiquid, privately held entertainment assets. Music and sports teams are different industries, but they’re both part of the entertainment sector. And a lot of entertainment assets are privately held. Privately held assets don’t trade very much, and they tend to be illiquid. It is therefore notable when two kinds of these assets are being sold at the same time.
Further, entertainment assets, like all kinds of assets, tend to inflate in value when interest rates are low. And, when interest rates are high and cash is scarce, they tend to decline in value.
So here’s the thesis we want to steelman: When insiders sell privately held, illiquid assets to other investors, it is a sign that the asset value has reached its peak value, and that the asset will subsequently decline. It turns out that prompting ChatGPT to steelman an argument is a great way to rapidly understand an argument’s strengths.
An important consideration: the response that you will see, later in this post, from ChatGPT, is based in part on the custom instructions which I have provided to it. For a discussion of ChatGPT’s Custom Instructions feature, and the custom instructions which I have provided to it, see this post.
To understand where we’re going with this argument let’s first quote some salient parts of each article. Here’s Ted Gioia talking about the decline in value of IP rights to certain music portfolios:
On Thursday, Hipgnosis announced a plan to sell almost a half billion dollars of its song portfolio. They need to do this to pay down debt. That’s an ominous sign, because the songs Hipgnosis bought were supposed to generate lots of cash. Why can’t they handle their debt load with that cash flow?
But there was even worse news. Hipgnosis admitted that they sold these songs at 17.5% below their estimated “fair market value.” This added to the already widespread suspicion that current claims of song value are inflated.
Hipgnosis’s share price actually dropped after the announcement.
Here’s the Hollywood Reporter discussing sports teams sales:
But there are also signs that the exclusivity of investing in sports is beginning to crack, as teams, leagues and owners seek cash from the public markets or other types of investors to pursue growth — or an exit from expensive investments.
Most recently, the John Malone-controlled Liberty Media spun out the Atlanta Braves, a perennial MLB contender, into its own stock. Before, investors could buy Liberty Media stock (which included its ownership of the Braves), but the spinout gives investors a chance to own a direct piece of the team, which clinched a division title and playoff berth Sept. 14.
Liberty, which also owns large stakes in SiriusXM, Live Nation and other companies, has been aggressive in the sports space — and with making those sports easily accessible to investors. Liberty also launched a tracking stock for its Formula 1 racing business, giving investors a stake in the future success of the increasingly popular sport.
The common thread here is that insiders are selling these assets in order to raise cash. That’s never a good sign.
So here’s where ChatGPT comes in. Consider the following prompt: Steelman this argument: When insiders sell privately held, illiquid assets to other investors, it is a sign that the asset value has reached its peak value, and that the asset will subsequently decline.
Of course, for every argument there is a counterargument. You could just as easily prompt ChatGPT to provide counterarguments to the argument presented. The point of this post is not the truth of the claim that “insiders selling indicate peak asset values have been reached.” Rather, the point is to demonstrate how ChatGPT can be used to better understand an argument.
Everything that follows this sentence was written by ChatGPT.
Steelman Argument: Insiders Selling Privately Held, Illiquid Assets Indicates Peak Value and Subsequent Decline
Core Thesis:
When insiders—people with intimate knowledge of a company or asset—decide to sell privately held, illiquid assets to other investors, it is often a strong signal that the asset has reached its peak valuation and is likely to face a downturn in value soon. This is grounded in the assumption that insiders have superior information and understanding of the asset’s fundamentals.
Supporting Points:
Insiders Have Better Information: Insiders have access to detailed and nuanced information about the asset that public investors do not. This could range from performance metrics, balance sheets, future plants, and current challenges. Their decision to sell can be an indication that they see no further upward trajectory.
Incentive Alignment: Insiders have the most to lose from the decline of the asset; their reputations, job security, and financial stake are tied to the asset’s performance. Hence, their decision to sell is not taken lightly and often signals a lack of confidence in future growth.
Liquidity Concerns: Given that the assets are illiquid, insiders would only opt to sell if they have strong reasons to believe that holding onto them could lead to financial loss or if they think liquidity will become an even more serious issue in the future.
Market Sentiment: Insiders are often industry veterans who understand market cycles. Selling an asset can indicate they believe the market has peaked and that a correction or downturn is imminent.
Asset Illiquidity as a Double-Edged Sword: The illiquid nature of these assets means there’s a smaller pool of potential buyers. Insiders, knowing this, would still opt to sell, underlining the urgency or the strong belief that the asset’s value will decline.
Shift in Investment Strategy: Such a sale could also indicate a change in insiders’ investment strategy from high-risk illiquid assets to lower-risk liquid assets, signaling less trust in the asset’s future prospects.
Contrarian Indicator for External Investors: Such insider trading patterns have often been used as contrarian indicators by external investors. They assume that if insiders are selling, it’s high time to reevaluate the asset’s true value.
Regulatory Oversight: In many jursidctions, insiders are required to disclose such transactions, meaning that the act of selling is usually premeditated and compliant with legal procedures, adding more weight to the message it sends to the market.
Diversification as a Red Herring: While it could be argued that insiders might sell for reasosn such as portfolio diversification, the combined weight of the above point makes this less likely, especially in the context of privately held, illiquid assets.
By synthesizing these arguments, one can assert that insiders selling privately held, illiquid assets is a red flag that should not be ignored. It often indicates the asset has reached its peak value and is likely to decline in the foreseeable future.