Download Would a free-market be a perfect market?

Musings on investing
www.jayantbhandari.com
26 September 2013
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Would a free-market be a perfect market?
Cases of Windarra Minerals (WRA) and Wesdome Gold Mines (WDO)
I am a firm believer in Laissez-faire capitalism. This is not because the free-market leads to
most productivity and wealth but because it is the only principled way for humans to interact
and transact. From an individual’s point of view, in our grotesquely overregulated world, belief in
the free-market can in fact be self-defeating economically. Political connections, lobbying etc.
can indeed make an individual wealthy. But I don’t care much for ill-earned wealth.
Anyway, this musing is not to detail why and how free-market is the only ethical system but to
differentiate it with the concept of the perfect-market.
Some people seem to think that a free-market would lead to a perfect market. At another
extreme, others seem to think that a communist system would lead to a perfect market. While
the communistic systems have historically lead to horrendous distortions and massive
sufferings, it would be erroneous to assume that the free-market would lead to a perfect-market.
It would not.
Market, even in the freest society, would still be an imperfect market, often very imperfect. You
only have to drive down your street to see this. Even in the case of a commodity like unleaded
gas, you can often see a difference of 5% between two stations in the same vicinity. If perfect
market does not exist even in an extremely liquid commodity, how can it exist in other things?
Indeed, I recently picked up a currency bill from a sidewalk in Denver while attending the gold
show here. I guess several “perfect-market” economists must have passed-by thinking that were
it actually there someone would have picked it up.
I want to give an example of how imperfect the stock market—particularly the illiquid, junior
segment—can be and how one with an understanding of simple algebra can make money.
I want to take you back to the musings on the forthcoming acquisition of Windarra Minerals
(WRA) and Wesdome Gold Mines (WDO) that I wrote on 24th August 2013. I had written
thinking that I had missed the opportunity to buy WRA and that the market had removed the
arbitrage difference between the two stocks. Interestingly, the arbitrage re-emerged a day after I
sent my musings. Since then, WRA has mostly traded for $0.05 and WDO has traded for
around $0.70. Given the ratio of the merger deal is very simple—one-share of WDO for tenshares of WRA—it is easy to see that anyone who has bought WRA likely positioned himself to
make as much as 40% within a week when the deal closes. Of course, there are always risks
that something can go wrong. But in my view, I am very, very happy to take this very minor risk
for a nice upside.
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The deal is now expected to close soon. If you do give an order to buy WRA, make sure you
don’t give it above $0.05—patience is a major virtue.
In conclusion, the concept of the perfect-market has no value. And given the illiquidity in TSX
Venture exchange, it often pays to keep an eye on opportunities like the above that require
neither geological skills nor a need to know complex calculus. Understanding of simple math
and a bit of common sense will do.
Sincerely,
Jayant Bhandari
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