<< I think the point you've made recently (was it on your Web
site?) about the price of a company tending toward the
replacement cost of capital sounds more intuitively
plausible, and is food for sober reflection. >>
It's in the article you referred me too, at:
forbes.com
which reads, in part:
"He has shown that we now have enough
data to test James Tobin's "q" theory,
first propounded in 1969. Briefly, q
theory says that the value of business
assets-as reflected in stock prices must
revert to the cost of replicating those
assets."
It's been 25 years since then, so my recollection may be off, but wasn't James Tobin of the "10%-annual-inflation-is-good-for-the-poor" school of Developmental Economics in the 1970's? If so, Latin America should have the fewest poor people by now -- and Germany should have the most poor people.
In any event, to say that in a free market prices received tend to converge to costs incurred is hardly an original insight. But, as has been discussed, is Microsoft's Intrinsic Value only the replacement cost of real estate, office furniture, desktop PC's, and CD-ROM stamping machines? Or, does it also include patents, team cohesion, entrepreneurship, market dominance of a critical bottleneck in a growing industry, etc.?
Why did Warren Buffett say that if he had $100 billion he couldn't build a better soda beverage company than Coke?
This brings up another example of the undercounting of equity I have written about. Someone added up Coke's marketing costs over the past umpteen years. The researcher went on to argue that the value of these expenditures did not disappear in the year expended. Instead, it is their *accumulated* cost that still inheres in one of the world's most recognized brand names. It turns out, if GAAP had allowed that amount to be capitalized on the asset ledger, instead of requiring it to be expensed on the income statement, Coke's ROE would not seem so off-the-graph, and by implication unsustainable, after all. |
