"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.
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.
Yup, 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.
> 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.
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.
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."
Where do you see a "theory" in that statement? I only see a calculation.
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.
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.
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...
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?
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.
" 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 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 :)
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.
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.
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.
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.
[+] [-] orasis|11 years ago|reply
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|11 years ago|reply
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.
[+] [-] ChuckMcM|11 years ago|reply
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.
[+] [-] Tloewald|11 years ago|reply
[+] [-] lazyjones|11 years ago|reply
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.
[+] [-] Spooky23|11 years ago|reply
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.
[+] [-] acconrad|11 years ago|reply
[+] [-] xyby|11 years ago|reply
Where do you see a "theory" in that statement? I only see a calculation.
[+] [-] fweespeech|11 years ago|reply
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|11 years ago|reply
[+] [-] bmh_ca|11 years ago|reply
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|11 years ago|reply
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...
[+] [-] seanv|11 years ago|reply
[+] [-] JustSomeNobody|11 years ago|reply
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.
[+] [-] raverbashing|11 years ago|reply
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|11 years ago|reply
[+] [-] Nrsolis|11 years ago|reply
[+] [-] thesumofall|11 years ago|reply
[1] http://www.indexologyblog.com/2013/09/03/too-high-or-too-low...
[+] [-] pfortuny|11 years ago|reply
[+] [-] trimbo|11 years ago|reply
http://www.amazon.com/When-Genius-Failed-Long-Term-Managemen...
[+] [-] carsongross|11 years ago|reply
[+] [-] nanoanderson|11 years ago|reply
[+] [-] ajmurmann|11 years ago|reply
[+] [-] tapatio|11 years ago|reply
[+] [-] tsuyoshi|11 years ago|reply
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.
[+] [-] lotsofmangos|11 years ago|reply
[+] [-] rdlecler1|11 years ago|reply
[+] [-] manishsharan|11 years ago|reply
[+] [-] jonwachob91|11 years ago|reply
[+] [-] jmngomes|11 years ago|reply