
Companies in the U.S. are valued 10% above the cost of replacing their assets - chollida1
http://www.bloomberg.com/news/articles/2015-05-18/nobel-winner-s-math-shows-s-p-500-unhinged-from-reality-or-not
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orasis
"If you sold every share of every company in the U.S. and used the money to
buy up all the factories, machines and inventory, you’d have some cash left
over."

So by this theory the value of a tech startup is the developer's laptops and
the value of a yoga studio is the loaner mats.

~~~
namecast
Hmm. I think the Bloomberg article oversimplified Tobin's work to the point
where a) your interpretation of the article's claim is correct but b)
definitely not in line with what Tobin claimed.

If Tobin were still alive, I think he would insist that intellectual property
(read: code, patents, trademarks and software licenses) also be included. He
didn't care about 'factories, machines and inventory'; he cared about
'replacement costs'. The author seems to have glossed over that bit for the
sake of brevity and clarity, and in the process accidentally introduced a
logic error, at least IMHO.

~~~
viggity
Obviously, however, replacement cost for intangibles is impossible to estimate
accurately. Especially if you consider the risk that the "replacement" is a
failure or doesn't accurately replace the institutional knowledge,
intellectual property and goodwill the company has accrued.

It is fair to say that stock prices are not representative of current value,
but rather the long term value and growth the company has yet to realize. So
in that sense, Tobin is right, but the growth the company has yet to realize
is really just goodwill accrued as an asset. Meh. I'm rambling now.

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fweespeech
The problem with Q ratio is it relies on hard assets. The reality is, much of
the US industry isn't dependent on hard assets and is instead based on the
value of the software that runs on those assets.

[http://en.wikipedia.org/wiki/Tobin%27s_q](http://en.wikipedia.org/wiki/Tobin%27s_q)

This is an economic theory that was first published 1968/1969\. It was a good
model when Tech/IT wasn't a huge sector of the economy in its own right.

~~~
seanalltogether
Customers are probably one of the highest rated "assets" of any company
nowadays. So much of the expenses of the company go into acquiring them.

~~~
fweespeech
Yes. But my understanding of the Q ratio is it takes into account on-paper
assets, not the cost of "acquiring" customers or knowledge to produce R&D type
"assets".

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bmh_ca
Rationally priced assets are valued by their prospective value.

In principle, the valuation seems overly simplistic. Corporate stocks — the
combination of people and entitlements that can be wielded to generate revenue
– should be more than the sum of the value of the piecemeal assets, IMHO.

Even if not overly simplistic, I feel like the methodology would leave a lot
of room for broad speculation. How did they value: future redeemable assets,
trade assets, intellectual property, intangible leverage, market and
demographic prospects, cultural distinctions of the corporation, and goodwill?
These things all tend to be waffly in the accounting, but they have a real
impact on future income and therefore the prospective value of the company.

Everything I have read about Tobin suggests that the man was spectacularly
clueless, and every time I read something about him I cringe and emit some
guttorial sigh. In all likelihood I deeply misunderstand his thinking, but I
have yet to see anything remotely resembling clear, persuasive arguments in
defence of his ideas, which seem tragically disconnected from economic
reality.

~~~
VLM
Ah but the interesting part isn't the long term correction factor but the
rather shocking change over just a couple years. What has really changed in
the last five years economically to result in such an impressive increase? Oh,
nothing? Well, these things do vary randomly over time while tending to revert
to the norm.

It is true, that when I toss a ball into the air, the error of my measurement
from the instantaneous position of the ball to the gravitational center of the
earth is very fuzzy. In fact the error bars are probably wider than the
measurement of height given enough hand wavy argument and bad measurement
tools. I agree with your interpretation of that observation. I really don't
have any idea how far away that baseball is from the center of the earth. None
the less, toss the ball up in the air higher than you've ever seen it tossed
before, its coming back down faster than ever before, eventually.

Or rephrased it doesn't seem to be a random walk error where the odds of being
higher or lower are always 50:50 no matter if its right on 1.000 or higher
than its ever been. It does seem to revert to the norm. So if its higher than
its ever been, then the odds of reversion to the norm in the near future are
higher than they've ever been...

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seanv
can we conclude that it's basically become a game at this point? place your
bets, manipulate where you can, and hope you sell before the other guy does?

~~~
JustSomeNobody
Exactly this.

Things are never going to change because you'll never get enough people to
willingly give up making so much money. Take bubbles, i.e.: When the numbers
are so far askew that everyone knows there's a bubble, you are still not going
to see anyone not play the game. There's just too much money to be made.

~~~
TheOtherHobbes
And Tobin's point is that we're all feeling bubble-icious.

Handwaving about intangible values or customer goodwill doesn't change the
fact that market expectations are primarily built on faith in the future,
which is an _entirely irrational_ basis for economic decision-making.

It's certainly difficult to quantify the value of IP, as opposed to the value
plant and machinery.

But are most valuations driven by guesses about the future value of IP that
have at least some connection with economic reality? Or are they driven by
hope, hype, and momentum?

The reliable and empirically predictable manic-depressive boom-bust cycle of
corporate capitalism strongly suggests the latter.

Or to put it another way - at some point the QE taps are going to be turned
off, and the economy is going to have to go back to buying and selling stuff
that people want instead of relying on stock price inflations created by cheap
money hand-outs to banks so generously donated by the Fed and the other
national banks.

Anyone who thinks there won't be a "significant adjustment" when that happens
is - IMO - fooling themselves.

~~~
john_b
> _" market expectations are primarily built on faith in the future, which is
> an entirely irrational basis for economic decision-making"_

Faith in some version of future events is the _only_ rational basis for
economic decision making. You pay present money in the hope of future value,
because otherwise you'd simply retain the present discounted value of the
purchase price.

As long as that faith isn't blind, but instead well researched and based on a
defensible thesis, there's nothing wrong with it.

On a company-by-company basis, it's practical to evaluate how much of the
company's market value derives from intangible components like goodwill and
market position, but it's much harder to do it on the scale of _an entire
economy_ , which is what the analysis in the article claims to do.

It's more reasonable to look at capital intensive industries like
manufacturing and agriculture and see if their Q values are historically high.
Lumping compannies like Adobe and Apache into that same group and using the
same metrics for the whole group is disingenuous.

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raverbashing
" According to Tobin’s Q, equities in the U.S. are valued about 10 percent
above the cost of replacing their underlying assets -- higher than any time
other than the Internet bubble and the 1929 peak."

Cue the "new normal" excuses. The "prices have reached a plateau". The same
pre-buble-burst talk that has happened every other time.

This _will not_ end well.

~~~
Tloewald
We'll know we're doomed when WIRED has a cover story on "The Long Boom" and
how this time it's for real.

~~~
jmngomes
Management "consulting" firms are probably already preparing strategy maps for
the next "new normal"...

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Nrsolis
"The market can stay irrational longer than you can stay solvent." \--John
Maynard Keynes

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thesumofall
This article seems odd to me. According to this article [1] a value of 1.1 is
rather normal for the last couple of years and the value they are comparing it
to is an outlier (of the 2009 crisis). It's likely that the intangibles are
driving the recent values above 1.0. Anyways: Stock prices _are_ high - just
not sure if Tobin will help us finding the right way out :)

[1] [http://www.indexologyblog.com/2013/09/03/too-high-or-too-
low...](http://www.indexologyblog.com/2013/09/03/too-high-or-too-low-look-at-
tobins-q/)

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pfortuny
Remember Long Term Capital Management... Just in case, Nobel Prizes & "Maths"
can be very wrong.

~~~
trimbo
For anyone interested in this topic, be sure to read "When Genius Failed". I
finally read it last year and it's excellent.

[http://www.amazon.com/When-Genius-Failed-Long-Term-
Managemen...](http://www.amazon.com/When-Genius-Failed-Long-Term-
Management/dp/0375758259)

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nanoanderson
Capital value is not how the stock market has valued companies, not since the
middle of the 20th century, at least. See
[http://www.crossingwallstreet.com/archives/2015/05/dont-
fret...](http://www.crossingwallstreet.com/archives/2015/05/dont-fret-about-
tobins-q.html) for a nice explanation.

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ajmurmann
I find it interesting that it seems like critics of the Q ratio justify the
high price by saying that because of low interest rates, other investment
options are worse. As much as I agree that still makes it a bubble. It's just
not that investors get drawn to the attractiveness of the bubble on the stock
market, but rather that the bubble is there because everyone gets pushed into
it. Even if you don't buy the Q ratio, this reasoning if correct would mean
that the stock market is most likely higher than it should be and probably
won't stay there.

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tapatio
Q value doesn't include brand value. The McDonald arches are just as valuable,
if not more, than the the fryers, heat lamps, and buildings.

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tsuyoshi
I guess this is talking about price-to-book? In some other countries, price-
to-book is usually close to 1, or even below it, which always struck me as
strange. Either something is wrong with their stock markets, or companies are
not as profitable as they might be for some reason. (Maybe a good reason;
profits aren't everything in life). I'm not familiar with the Q ratio so maybe
it's a slightly different concept...

It makes sense for a single company, if it is so unprofitable, even including
future potential profitability, that it really should be shut down and
stripped for assets. But ordinarily I would expect a company to be worth
significantly more than its book value. Otherwise, you could easily recreate
the company by just "replacing" the assets. But this is only true if the
company is based entirely on easily replaceable, low skill labor. Are there
any large companies like this anymore?

In reality, there are intangible assets - and I'm not talking about software
etc. - that are very difficult to measure, and guarantee that any worthwhile
business should be valued at more than its tangible assets. Some things are
hard to price, but might be possible to sell off: brand identity, customer
base, marketing data, etc. Still, replacing these things is hard.

Some things are very hard to sell off. Businesses have employees, and
employees are in an organizational structure where they know how to work with
other employees to get their jobs done. As well, there are relationships with
contractors and vendors. Replacing these is extremely hard.

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lotsofmangos
I thought markets were designed for unhinging numbers from reality. Surely
that's what leverage is all about.

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rdlecler1
This doesn't account for the liquidity premium, talent, internal process. 10%
seems like a bargain. If I bought a equipment today, it would be worth less
tomorrow and I'd have to sell it at a deep discount. Investors pay up to have
a liquidity premium.

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manishsharan
Not only is this model flawed but this sort of thinking makes it hard for
small software companies to borrow money : banks value you company only based
on hard assets. This limits software companies to raising cash only by selling
equity.

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jonwachob91
So fuck my IP right? It's not worth anything more then the air I breath...

~~~
jmngomes
It isn't, unless you can actually sell it.

