One of my all-time favorite people claims, "the whole world ain't nothing but numbers." As I study the current business environment, it appears that such claim may be false. On a daily basis, I see financial pricing that does not seem intelligible. It's happened before: 1999.
In 1999, I saw pricing that could not be reconciled to reality. The "tech bubble," as it came to be known after the fact, presented itself as a rational valuation model to fund disruptive technologies based on the revolutionary power of the Internet. The thesis that the Internet would change everything has proven profoundly true. I am actually starting to believe that the Industrial Revolution was a mini-version of the Internet Revolution. (So much for Ted Turner's claim that the internet was simply a place to watch porn.)
In retrospect, Alan Greenspan was correct in assessing that there would be some winners but that it was purchasing a lottery ticket. The idea of paying 9 - 15 times revenue was simply extraordinary. On the other hand, the idea of not giving value to companies simply because they were early stage and without earnings is not sensible. However, financial and mathematical tools are at their worst in such valuation attempts and I was wise to be part of a team that decided we weren't up to the task.
The current environment seems even more daunting. Today it is clear that there are winners who have successfully disrupted the environment. It is unclear that these winners will be allowed unlimited market power - which is what it would take to defend current valuations. This challenge is compounded by an abundance of central bank-driven liquidity that distorts bond pricing. The matter of valuation today is risky and confusing and those who claim otherwise need to explain Berkshire Hathaway's inability to allocate $100 billion in barely one percent yielding cash (pre-tax number).
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