Graham and Doddsville -- Value Investing In The New Era Message Board

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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: porcupine --''''> who wrote (1428)	3/15/1999 12:18:00 PM
From: Freedom Fighter	Read Replies (1) of 1722

Porc, >>If the present economic value of all future payments to current labor is zero, and therefore itself not an asset, and if U.S. entrepreneurship, which is among the world's most vital, also has an economic value of zero, then, yes, the market price of all U.S. businesses must converge to the replacement costs of its assets in the long run.<< In order to be worth the value of the assets deployed, a business (as a going concern) must earn some minimum return on its invested capital. Let's call it 10% for this discussion. Otherwise why not invest the capital in bonds or another alternative and grow the capital faster. This is a somewhat traditional and logical view. If the labor etc.. is not generating 10% on the existing capital, it may be foolish to reinvest the profits. In fact, the business is worth less than the value of its current assets (as a going concern) and should be liquidated to maximize value. There are probably thousands of companies that fall into this category but continue to operate. There are thousands of others that just make the grade. Only those that will generate superior returns are worth more than their assets. I think the value of labor and entrepreneurship is part of those returns. >> Since these replacement costs always fall in the long run (the inverse of the fact that the productivity of assets always rise in the long run) then inflation adjusted stock market prices should have been falling for the past 200 years, instead of rising.<< The increase in the value of both replacement cost of total assets and market value of stocks is related in part to inflation and in part to the reinvestment of profits. Let's say a $5 dollar hammer generates 50 cents. If 10 years later it costs $10, hopefully it will generate $1. If I have replaced the $5 dollar hammer from depreciation and profits and bought a second one from profits I now have $20 worth of assets generating $2. This is an increase in assets and most likely market value of stock. There are accounting issues here for depreciation, but that is another topic that I would like to save for another time since we've covered that ground already. Wayne

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