6 ms·

Companies in the U.S. are valued 10% above the cost of replacing their assets

41 points by chollida1 11y ago

ajmurmann 11y ago
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.
rdlecler1 11y ago
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.
seanv 11y ago
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 11y ago
  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 11y ago
    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.
    - Ntrails 11y ago
      As someone who has refused to put money into shares for the last 18-24 months on the basis that this shit is artificially high and cannot last... I feel like a fool :(
    - c_lebesgue 11y ago
      Well, to be fair, the QE program has been stopped, and S&P 500 is still skyrocketing.
    - john_b 11y ago
      > "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.
orasis 11y ago
"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.
- lazyjones 11y ago
  > 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. Indeed, I'm wondering why the quoted ratio is so low (1.10). Much of a company's value is in its customer and supplier relationships and these aren't tangible assets that can be sold.
  - sologoub 11y ago
    I believe the ratio tries to take into account all assets, tangible and intangible, but I have no idea how for example Facebooks user base/network effect would be recognized in GAAP accounting. Does anyone know?
    - foobarqux 11y ago
      It's not.
    - jacobr1 11y ago
      goodwill?
      - foobarqux 11y ago
        They didn't acquire the users through M&A.
  - repsilat 11y ago
    > Indeed, I'm wondering why the quoted ratio is so low (1.10) Not just that -- from the article: >> To Smithers, the ratio’s doubling since 2009 to 1.10 Having "the economy" be "worth" only 55% of its scrap value seems crazy...
fweespeech 11y ago
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 11y ago
  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 11y ago
    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".
raverbashing 11y ago
" 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 11y ago
  We'll know we're doomed when WIRED has a cover story on "The Long Boom" and how this time it's for real.
  - rbanffy 11y ago
    You know... if they repeat the article every time, one day they'll be right.
  - jmngomes 11y ago
    Management "consulting" firms are probably already preparing strategy maps for the next "new normal"...
bmh_ca 11y ago
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 11y ago
  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...
thesumofall 11y ago
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-look-at-tobins-q/ http://www.indexologyblog.com/2013/09/03/too-high-or-too-low...
pfortuny 11y ago
Remember Long Term Capital Management... Just in case, Nobel Prizes & "Maths" can be very wrong.
- carsongross 11y ago
  True, but they are almost always very wrong to the upside.
- trimbo 11y ago
  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-Management/dp/0375758259 http://www.amazon.com/When-Genius-Failed-Long-Term-Managemen...
manishsharan 11y ago
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.
lotsofmangos 11y ago
I thought markets were designed for unhinging numbers from reality. Surely that's what leverage is all about.
jonwachob91 11y ago
So fuck my IP right? It's not worth anything more then the air I breath...
- jmngomes 11y ago
  It isn't, unless you can actually sell it.
Nrsolis 11y ago
"The market can stay irrational longer than you can stay solvent." --John Maynard Keynes
nanoanderson 11y ago
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-about-tobins-q.html http://www.crossingwallstreet.com/archives/2015/05/dont-fret... for a nice explanation.
tsuyoshi 11y ago
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.
tapatio 11y ago
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.

41 points by chollida1 11y ago

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.

rdlecler1 11y ago

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.

seanv 11y ago

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 11y ago
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 11y ago
  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.
  - Ntrails 11y ago
    As someone who has refused to put money into shares for the last 18-24 months on the basis that this shit is artificially high and cannot last... I feel like a fool :(
  - c_lebesgue 11y ago
    Well, to be fair, the QE program has been stopped, and S&P 500 is still skyrocketing.
  - john_b 11y ago
    > "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.

orasis 11y ago

"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.

lazyjones 11y ago
> 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. Indeed, I'm wondering why the quoted ratio is so low (1.10). Much of a company's value is in its customer and supplier relationships and these aren't tangible assets that can be sold.
- sologoub 11y ago
  I believe the ratio tries to take into account all assets, tangible and intangible, but I have no idea how for example Facebooks user base/network effect would be recognized in GAAP accounting. Does anyone know?
  - foobarqux 11y ago
    It's not.
  - jacobr1 11y ago
    goodwill?
    - foobarqux 11y ago
      They didn't acquire the users through M&A.
- repsilat 11y ago
  > Indeed, I'm wondering why the quoted ratio is so low (1.10) Not just that -- from the article: >> To Smithers, the ratio’s doubling since 2009 to 1.10 Having "the economy" be "worth" only 55% of its scrap value seems crazy...

fweespeech 11y ago

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 11y ago
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 11y ago
  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".

raverbashing 11y ago

" 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 11y ago
We'll know we're doomed when WIRED has a cover story on "The Long Boom" and how this time it's for real.
- rbanffy 11y ago
  You know... if they repeat the article every time, one day they'll be right.
- jmngomes 11y ago
  Management "consulting" firms are probably already preparing strategy maps for the next "new normal"...

bmh_ca 11y ago

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 11y ago
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...

thesumofall 11y ago

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-look-at-tobins-q/ http://www.indexologyblog.com/2013/09/03/too-high-or-too-low...

pfortuny 11y ago

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

carsongross 11y ago
True, but they are almost always very wrong to the upside.
trimbo 11y ago
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-Management/dp/0375758259 http://www.amazon.com/When-Genius-Failed-Long-Term-Managemen...

manishsharan 11y ago

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.

lotsofmangos 11y ago

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

jonwachob91 11y ago

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

jmngomes 11y ago
It isn't, unless you can actually sell it.

Nrsolis 11y ago

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

nanoanderson 11y ago

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-about-tobins-q.html http://www.crossingwallstreet.com/archives/2015/05/dont-fret... for a nice explanation.

tsuyoshi 11y ago

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.

tapatio 11y ago

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.