For years Warren Buffet has stayed away from the stock market. Now he is buying American stocks. Why? And what does that mean to you and me? Look a little deeper and you’ll see it is more than just buying stock. Buffet’s decision to buy now tell us two things about his view of our economic future.
1. Invest in people and their ideas. Stock price can be broken down into two broad categories: (A) The part of the price that comes from tangible assets; and (B) The part of the price that comes from intangible assets. The first part is book value and that refers to all the brick and mortar assets, such as equipment, property, etc. Book value makes up the smallest portion of most stock prices, even in the biggest companies that have vast physical holdings.
Intangible assets can be broadly described as the value of the people, their ideas and all the contracts they put together related to executing those ideas. This is where the vast majority of stock price comes from - the confidence the public market has in a company’s people and its ideas, and the ability of that company to execute the ideas in a way that makes financial sense.
When Buffet was out of the market saying it was overpriced, he was saying the leaders of public companies cannot convert their ideas into cash at the level required to support the high stock price. Now he is back in the market and encouraging you and me to go there too. Why? Because you buy low and sell high, and Buffet believes that the talent and ideas in his selected companies will generate financial results that are greater than than their stock price reflects today. He’s investing in the intangible assets. He is investing in people and their ideas.
Buffet appears to believe that innovation and leadership will pull America out of this recession and he is putting his money where his mouth is on the subject.
2. Now is the time to innovate and execute. The temptation to crawl in a hole may be profound, but now is the time to innovate and execute the plan for the innovation in a way that makes financial sense.
What is your innovation? What is your plan? Got a team around you? Now is the time, according to The Oracle of Omaha.
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{ 3 comments… read them below or add one }
Mary Adams 10.28.08 at 2:31 am
The current crisis is showing us that we have to change our way of looking at companies. Buffet gets access to management teams and can make a call on the quality of their ideas and their abilities. The challenge will be to develop information that everyone else can use about these intangibles so that managers, boards, analysts and investors can make the same great call. This is no longer a “nice to have” information set. Information about intangibles is critical to our economy’s ability to innovate.
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Shane Lashley 10.28.08 at 3:05 am
Mary - I could not agree more. In other countries, the accounting rules allow companies to put the value of their intangibles - and the source of that value - on their balance sheet. FASB (Financial Accounting Standards Board) doesn’t allow that in the US with GAAP (Generally Accepted Accounting Principles). Therefore, someone almost has to have mystical powers of mind reading to figure out where the value is and isn’t on the intangibles side of the business.
Both presidential candidates are promising to overall the patent system due to some abuses and holes in the patent system. In my opinion, unless they also couple that with some changes in the transparency of value at a corporate level, mainly through how they are accounted and reported, changing the USPTO doesn’t help near as much as either candidate wants us to believe. I hope the winning president will have advisers that provide that perspective.
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Shane Lashley 10.28.08 at 3:25 am
Correction: I meant to say “overhaul” not overall….
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