November is hanging on by the threadiest of threads and we are set to enter December.
That means a seemingly endless parade of holiday music, yards filled with inflatable cartoon characters (huh?), and "doorbuster" sales. By the way, has anyone ever seen a store with its doors actually busted down by shoppers? If you have, let me know.
Then there's the unrelenting bombardment of holiday shows and movies on TV. Go ahead and call me a Grinch; you won't be the first or the last.
Admittedly, I do enjoy a few of these. Yes, I like the Grinch and also "A Christmas Carol." We all know the story, right? A mean, cranky guy decides to change his ways after being visited by 3 ghosts representing his past, present and future. Before you all start writing back, yes Grinch-Scrooge, I see the common thread. Leave me alone.
Alas, at some point we have to get back to work and this is really a newsletter about why and how companies are worth what they're worth and how and why they are bought, sold, or argued over. So picking up the thread from above, many of us know that there are three basic approaches to valuing a business; namely the asset, market, and income approaches and like Scrooge's three visitors, each has its own story to tell.
Simply stated (and I know there's a LOT more to this but I only have so much space and you have only so much attention span):
- The Asset (or cost) approach is based on the balance sheet of a company and adjusting the stated book values of the assets to reflect current market values. It's a lot like the Ghost of Christmas Past telling you "this is where you've been, now let's see where that led you."
- The Market approach is based on the values of companies or assets that are similar to the one you're valuing. If you've ever bought or sold a house or done comparison shopping for this year's must-have gift, you get the picture. So it's like the Ghost of Christmas Present saying "look around at others like you and tell me what you see."
- The Income approach is based on a future stream of cash flows (or benefits of some sort) that are discounted, based on risk over time, to today's value. So of course - and by process of elimination, this is like the Ghost of Christmas Yet-To-Come. Like Dickens' shadowy specter, it's mysterious and maybe even scary but as Scrooge found out, if there are changes happening in the present, the future can look very different so it's a useful tool when the future looks different from the past or the present.
The approaches used are based on the situation and we typically use more than one approach, depending on the purpose, the available information, and the nature of the business. Its certainly interesting work and after almost 30 years of solving these sorts of problems, I think I've got the hang of it.
Well, that's all I have to say about that. Now, here are some words of wisdom from people who aren't me:
"Never make predictions, especially about the future" - Casey Stengel
"Before I came here I was confused about this subject. Having listened to your lecture I am still confused. But on a higher level." - Enrico Fermi
"If we open a quarrel between past and present, we shall find that we have lost the future." - Winston Churchill
Thanks for reading. Be good and be well.