That is a thought from George Goodman, author under the Pseudonym Adam Smith, of “The Money Game.” The book came out in 1968. It has always been true and is true now, more than ever.
Net tangible assets doesn’t mean much anymore. I suppose mortgage holders might care, but today’s businesses are based upon market position and the ability to defend it. In modern businesses, net tangible assets provide a small fraction of market value. Most people base value on earnings and assumptions around growth and competition. Ability to influence prices and cost leadership factor in too. R&D matters. People make price decisions on stocks differently than they did even 20 years ago.
It isn’t just high tech companies. Look at a company like Walmart. Which is worth more, their stores or their logistics system?
Governments lose influence when net tangible assets shrink.
Governments did not exist to any extent until there were farmers. Governments are demanding and hunter-gatherers just moved on when the rules became too onerous. Farmers didn’t have that option. It is not a coincidence that people with something immobile and valuable are more amenable to intrusive government.
Unions have the same problem. Until Henry Ford built River Rouge, Carnegie build the steel industry, and the railroads connected the country, businesses were pretty much immune to unions. You cannot demand much from someone who can just walk away.
So the net tangible asset issue will affect policy. If it gets too hard to be in North America, businesses will pick up their coffee mugs and move on. Most of the other things they use, like computer workstations and networks become obsolete fairly quickly, so walking away is easy enough.
Think how mobility affects the idea of “Economic rent” Governments and unions are among the most prolific beneficiaries of that point.
Fortune published a 4,000 word article recently concerning how Warren Buffett is amending his stock selection methodology. An Evolve-or-Die Moment for the World’s Great Investors
Do you think Buffett bought $50 billion worth of Apple because they have low debt to equity ratios or a sound current ratio? Probably not. He sees them to have a market franchise with a deep moat surrounding it. Their business model and market perception is the key. Does that matter. In the short run, yes, but it took Ford decades to become a weak company. If Apple is taken out of their key position, it will take only a few years.
Times change quickly when your key assets go home for dinner each evening and their tools are mostly software. Even better the cost to produce another unit of product is near zero. All tech businesses are operationally leveraged. Huge fixed costs and near zero variable costs.
Read the article and pay attention to how the business-government connection will play out. It is unlikely to be anything like the way governments think it will be.
Rethink your approach to valuing businesses.
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