Valuation vs. Wealth Creation

Once again I find myself entering a conversation dominated by Economists, this time to de-construct the problems of underfunded pension liabilities relative to their need to exceed actuarial returns on their investment portfolios.

Each time I turn towards Economics, I am impressed by the extent to which economists do not actually study the economy. What they study is prices, and valuation.  Ever since the days of David Ricardo, it seems, economists have pursued the Holy Grail of intrinsic value, driven by a need to believe that there is one, perfect, absolute and enduring "right" price for everything.

They need to let go. Over 150 years of experience with share price trading in the exchange-based marketplace has shown us what most of us already know: a thing is worth what someone else is willing and able to pay for it. Value is situational, provisional and contextual, driven by need and expectation within a shifting population of prospective purchasers who all, for the most part, have other things they would rather be doing.

I appreciate that industrial production requires standardized pricing, and that pricing strategy is an important part of mass merchandizing, but we can only do what we can do. In the end, pricing is more art than engineering.

When it comes to valuing an enterprise, so we can buy or sell shares in that enterprise, this existential reality manifests itself as volatility. Nobody really knows what an enterprise is "really worth", and so the actual prices at which shares do trade bounce around, driven as much, if not more, by emotion than reason. Net Asset Value is a report of history, actually a report of a precise moment in history. It is not a measure of future reality. The past is important to investing, as to all things human, as a guide to what we can expect in the future, but investing is really all about the future.

For investors whose only option is to participate in the public markets, I understand that is cold comfort. It is easy to see why they prefer to believe.

But for large, purposeful, perpetual investors, like pension plans, that do, or should, have other options, more satisfaction will be realized if they focus their energies on wealth creation, and let go of valuation.

Instead of trading on price, pension plans, and their plan sponsors and participants, will be better served if they concentrate on sharing in cash flows.

We cannot predict cash flows, but we can manage them. Share price cannot even be managed. Not, that is, without rigging the system. Which is against the law.