Blessed by the Potato

Not so long ago, I read an article refuting efficient market theory, using the example of Tanzanian Royalty Exploration as a case of an obvious inefficiency. It’s a strange example to pick, because it doesn’t actually support the thesis.

A quick refresher: just over two years ago Sino-Forest was exposed as a fraud (at the time, alleged to be fraudulent). It plunged in price, losing some 75% in the first few days. Sino-Forest traded on the TSX under the symbol TRE. At the same time, a company called Tanzanian Royalty Exploration fell about 8% in a few days. It happened to have the same ticker symbol — TRE — but on a different stock exchange. The story was that in the panic to dump Sino-Forest, some people were entering the wrong exchange for the TRE symbol and accidentally selling off Tanzanian. Ha ha, crazy market, what a clear inefficiency! Tanzanian even went out of their way to change ticker symbols to avoid the confusion/stigma.

As cute as that narrative is, it hasn’t panned out: here we are almost two years later and Tanzanian has not come anywhere close to its May 2011 high. The drop co-incident with the Muddy Waters report on Sino-Forest could perhaps have been an inefficiency, but given the continued slide (now down 55% in two years) it appears as though it might have been a true, “efficient” decline after all. Perhaps the close timing and similar tickers are merely one of life’s funny coincidences. Nobody who identified the coincident ticker symbols and price drops at the time and assumed it was a market inefficiency made any money trying to play it. And I don’t think anyone using the example a year or more later is making a very strong case for active investing.