The World Has Already Changed

“The world is not the way they tell you it is.”

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.

If we examine our world today, what do we find?

  1. Politicians seldom, if ever, tell the truth.
  2. Most decisions are political first rather than practical. In Canada, the pipeline issue is a political thing. Engineers could solve it without the drama in a month. Same point in the US regarding the border wall. Drama however, sells and the media likes drama better than facts.
  3. The time envelope is very short. Three weeks ago is forever and few even notice it. Yet projections of the future reach to the year 2100 and beyond. If three weeks ago is irrelevant so is 81 years from now.
  4. People know things based on their echo chamber. In “The Great Reckoning” a book from 1994, authors Rees-Mogg and Davidson, pointed out that if Australia sank into the sea, until someone wrote a song and produced a video about it, many would not find out. Given the way social media works, it is easy to miss things outside your sphere.
  5. Availability of capital used to decide which businesses were born and grew and which were never seen.
  6. Graham-Dodds liked net tangible assets, but not all money managers give it much consideration today.

How that applies today

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.

A long article worth reading.

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.

I help business owners, professionals, and others understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

In previous careers, I have been a partner in a large, international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. 705-927-4770

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: