This article is going to be half-column, half-survey, because I genuinely don’t know the answer to the question I’m about to propose to you, the reader: How do you place a numerical value on a given stock in Second Life? 

In real life, there are extensive tomes written about this question.  Answers vary from the simple and easy-to-understand to complex formulae that require specialty software to calculate (or a doctorate in Mathematics).  However, in Second Life, no such guidance exists.  There are certain rules of thumb, so to speak, such as not investing in anything you cannot understand, and not investing any more than you’re willing to lose.  There are some calculations that can be done with the statistics provided from financial reports, such as NAV (Net Asset Value), P/E (Price divided by Earnings), and dividend yield (dividend over a certain period of time divided by the stock price).  Overall, though, there is very little analytical guidance to be found.

I thought it might be insightful to try out one of the real-world mathematical models to some Second Life securities and see how they perform.  Beware that this is in no way a complete statistical analysis and my sampling methods are haphazard at best. 

The Gordon Growth Model (or Dividend Discount Model) allows investors to take a stock’s current dividend, the current interest rate, and the expected growth rate of the stock’s dividend, and compute a share price from those values.  While the derivation is somewhat complex, the end result is a compact little formula, which is expressed as D₁/(k-g) = P, where D₁ is the dividend in time period 1, k is the interest rate demanded by the market, and g is the expected growth rate of the stock.

Using a monthly interest rate determined by SLCapEx’s current daily rate (0.10% per day), k = .03044.  I will make a further simplifying assumption that g = 0, because we don’t have much data in the realm of dividends to determine a growth rate.  I will summarize my findings in the table below:

 So as you can see, there’s not much of a conclusion to be drawn here.  Some of this can be blamed because I’ve taken the growth rate component out of the formula.  I suspect a full-out statistical study would be inconclusive, but that’s just a hunch.

My fear and suspicion is that many investors use the “greater fool” theory of investing. The idea is that you will buy a stock only because you think someone else will buy it from you later at a higher price.  That’s it.  No numbers, no studying the company, just the idea that the price will rise.

A fair number of investors also use value investing , as well. This method looks for undervalued companies and holds them until they reach a more appropriate value for the market, at which point the investor sells.  This is the method used by some of the most famous investors in First Life, such as Warren Buffett.  There is no numerical model for value investing, like the greater fool theory.  However, with value investing, an investor will seriously study the company before deciding to purchase.  The easiest way to tell a value investor from a greater fool investor is to quiz them about the company: a greater fool investor won’t be able to tell you much more than the ticker and price, but a value investor could give a lengthy speech almost impromptu.

So, readers, how do you value the stocks you buy (if you buy)? Formulas?  Price history?  Trends? Dividends? Announcements? Chats with the CEO? Dice? Psuedo-Random Number Generators?  I look forward to your insights.

GM