Some time back there were discussions by some bloggers on the question of the individual’s net worth.
I came across 2 articles describing about net worth.
“Graham said that a company is no different than a person, who might think that her net worth was $7,000, comprising her house, worth $50,000, less her mortgage of $45,000, plus her other savings of $2,000. Just like people, companies have assets that they own, such as the products they make and sell, and debts—or liabilities—that they owe. If you sold all the assets to pay off the debts, what would be left was the company’s equity, or net worth. If someone could buy the stock at a price that valued the company cheaper than its net worth, Graham said, eventually—a tricky word, “eventually”—the stock’s price would rise to reflect this intrinsic value.” —-Extract from the book, The Snowball: Warren Buffett and the Business of Life
Below is from the article “Mark Cuban puts asterisk on Donald Trump’s billions” – (read here)
Last week, Trump said in a press release his net worth exceeded $10 billion.
“While it’s a big number, it’s not an important number. In fact, it’s a play number,” Cuban said via Cyber Dust, his own messaging app which, much like Snapchat, deletes the message’s content after a specific time period.
“Let’s say you own a painting that gets appraised at 10 billion dollars. That gives you a net worth of 10 billion. But that does not mean you have a lot of cash,” Cuban added. “In fact, it’s possible to be worth billions, but not be able to pay your rent.”
While reading about these 2 articles, I can’t help thinking about how we view an investment.
Are you a deep value investor like Graham who cares about the net worth of the company (assets, book value etc) or do you care more about the cash flow and growth of the company?
In this day and age, it is often the intangible aspect of the company’s that is valuable rather than the hard assets… an asset light company with a strong brand or patents, that is able to generate increasing cash flow, high ROE and high profit margins would probably be a better company (think FANG – Facebook, Apple, Netflix, Google or financial companies like Wells Fargo, Bershire Hathaway) than those heavy asset, traditional companies operating in a saturated market (typical mining companies, or airlines / shipping / automobile companies like SIA, NOL, General Motors etc) with barely positive ROE & profit margins. Yes large asset base, but not growing.
Don’t be mistaken, high net worth is good. For high net worth people like asset rich companies, the possibility of bankruptcy is remote. However having said that, even asset rich companies can fail and be sold. That is when their so called assets are worth only a fraction of the previously estimated figure – assets are only useful when they can generate income. Look at all the oil companies now trying desperately to sell their drilling machinery, currently considered as distressed assets to many (read here) or the mining companies like Swiss company Glencore with lots of mines but no buyers (read here and here).
Let’s not forget that companies like humans are growing & feeding entities. Without the will and ability to grow, a high net worth is destined to decline (and even vanish).
Or let’s flip the question another way, a high net worth person might do indeed have problem paying for the fine things in life. As Mark Cuban mentioned in the second article. Cash flow is what is important in the race for the presidency.
In Singapore, there are a number of older generation asset rich people (read the article below) with very little cash. By all measures, their properties are worth millions, but they have no cash on hand to spend. Or in Mark Cuban’s version, they may own a priceless piece of art work, but with no cash flow.
Asset-rich, cash-poor retirees speak up (read here)
“SINCE Independence, home ownership has been linked to national identity and as a way for Singaporeans to own an asset that keeps giving as property values appreciate. But this may have created its own problem – putting too much money into homes and retiring with too little savings on hand.
Professor Benedict Koh, director of the Singapore Management University’s Centre for Silver Security, says the asset-rich, cash-poor phenomenon is an outcome of over-investment in property. And the proportion of such seniors is only going to rise as the population ages, say Prof Koh and other observers.”
In our pursuit for wealth, we accumulate “assets” that in some cases do not generate cash flows. Wine, fine art, properties (which you stay in), luxury cars, yacht….even bonds and stocks (that don’t pay much dividends). There are a lot of things that do little or nothing but are worth a lot — jewelry (diamond / jems / gold), luxury watches, expensive mistresses :p etc….
From another angle, Warren Buffett does not invest in gold. Why? (read here)
Warren Buffett has been very vocal about his disdain for gold as an investment. He sees little to no value in gold. What Buffett refers to as a lack of value results from a lack of usefulness. He once stated about gold, “It doesn’t do anything but sit there and look at you.”
We accumulate assets at the expense of things that may make better sense – cash for a more comfortable life, medicine, fun moments with our family etc.
If I throw in the estimated price of my fully paid flat together with my stocks, savings etc, I would feel very rich. But then that is if I sell of my flat, to get the cash- where would I live then, rent a place?
Net worth is but a number, but what is more important is the ability to generate cash flow from that number and not have financial worries. To live a full life doing things that bring joy to you and the people around you. The intellectual pursuit for wealth creation to change a static pile of cash into a system that multiples itself over time.
Between person A and B, A might have a higher net worth, but if B has a history of consistent good increment in his investment / business etc (eg. able to consistently increase income) while A has a mediocre or terrible money management system, then to me, B might be more of a success. I would really like to pick his brain. One day, B might be able to achieve financial independence – to use his passive income for daily expenses. For A, if he does not know anything about growing his wealth, will always live hoarding his wealth, fearing of losing it.
Kind of like how I evaluate companies… high book value not really on the top of my list.
Net Worth… what is it worth? If you ask me, not a lot if you don’t know how to grow it.
Wealth = Asset Value (Net Worth) + Cash Flow
We will need fairly large asset value or net worth to generate sustainable cash flow for life then we will be in the state of financial independence.
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Ok, high net worth is good, just one part of the equation.
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