So, we start trying to decide whether accountings that the average investor can understand are feasible. The first question is whether the average investor can understand business in the “new economy.” To oversimplify, it seems to me useful to divide the new economy into 2 pieces: First, there is the world of post-modern finance: derivatives and their progeny. Second, is the world of high-tech.
When I think of derivatives, I always think of the old Eddie Murphy movie, Trading Places. Ralph Bellamy and Don Ameche are trying to explain the futures markets (the first public derivatives market) to the street person played by Eddie Murphy. Insightfully, Eddie noted something like “you guys are bookies.” Black and Scholes (after whom the first model for valuing derivatives is named) could not have put it better. Derivatives are just fancy bets on the value of something, with little or no investment in the item gambled on. Pricing the gamble is hard. Understanding the gamble is easy.
High tech below.
Understanding a high-tech business actually is trickier. The problem is that high-tech investments tend to be unusual and intangible. Buildings and machinery clearly are long-lived investments. They can be sold, if necessary. In contrast, for example, what about computer software? It costs real money to develop software. But, the software may be useless. (Think about the luggage software at the Denver airport.) Or, the software may the cornerstone of an intergalactic empire. Only time will tell? (But, the markets can’t wait.) Big software projects are not bought and sold sufficiently frequently that they feel like hard investments.
This intangibles problem is not limited to the new economy, however. GM and Honda have similar tangible assets, and yet are very different companies. (Another car analogy, I know.) And that Samuel Adams recipe…
More on beer and other surreal investments tomorrow.