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"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."
by 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 agoI 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?
- 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...
- djrogers 11y agoThe 'doubling' is from 1.05 to 1.10 -it's a ratio, not a %age
- ChuckMcM 11y agoYup, pretty much. One of the challenge of information economics is that the cost to recreate the information on which a business is founded can be much much higher than the cost of the hard assets (imagine what it would cost Google to recreate their search algorithms and index from scratch) That said, there is a pretty reasonable point that if bonds were returning 5 - 6% over 10 years rather than 1%, quite a bit of capital would move back into bonds and away from equities. That would put a lot of downward pressure on the price of equities.
- xyby 11y agoIf 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." Where do you see a "theory" in that statement? I only see a calculation.
- Tloewald 11y agoIt's quite possible that most startups are worth less than the developers' laptops.
- zachalexander 11y agoTrue, but laptops have a fixed price. They aren't worth $0 most of the time and $1B a tiny fraction of the time.
- DannyBee 11y agoThis may in fact, be wrong, if that laptop is the only way to say, stop and outage costing 100 million a minute. It would be worth $0 most of the time, and ~100 million a minute during that outage. (Rather than IP, let's say the laptop's TPM chip is what is necessary to get access to stop the outage, so it's tied to something real)
- mattmanser 11y agoNo, a laptop is worth what you can sell it for. You're over-thinking this.
- sanoli 11y agoBut companies also (especially startups) are valued by what they might become in the futre.
- Tloewald 11y agoI was taking this into account. Bear in mind that the future value of laptops is very low indeed.
- acconrad 11y agoMy thoughts exactly - first sentence in and we're already discrediting intangible assets, IP, and human knowledge workers.
- namecast 11y agoHmm. 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 11y agoObviously, 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.
- jackreichert 11y agoI always understood that potential revenue, to a certain extent, is baked into the value of the company. When things change in the market it doesn't necessarily effect the values of the companies, it's when something unexpected happens, because the market represents a perceived future value of the company.
- deleted 11y ago[deleted]
- Spooky23 11y agoQ ratio is Market Value / Asset Value. In the case of low value businesses like Yoga Studios & Startups, yes the value is nil. For good reason -- a Yoga studio's only asset is it's book of business. You don't fire the employees and get any meaningful liquidation value. Ditto for startups -- startups are evaluated at future value... present value is laptops + IKEA Tables. But we're not talking about Yoga studios, we're talking about Fortune 500 companies. When you are selling for more than you are worth, you'd better hope you keep delivering, because the market will punish you brutally when you slip up.
- Symmetry 11y agoFortune 500 companies have institutional cultures that have allowed them to avoid collapse despite their huge size. That's not any more trivial than someone who knows how to teach Yogo.
- Spooky23 11y agoThat may be true, but you can sell a Fortune 500 company. Good luck with your Yoga studio! (unless you own the building)