Posts Tagged ‘accounting’

On Stock Market Valuations, some light to the recurring scandals

November 15, 2008 1 comment

“There must certainly be a vast Fund of Stupidity in Human Nature, else men would not be caught as they are, a thousand times over, by the same Snare, and while they yet remember their past Misfortunes, go on to court and encourage the Causes to which they were owing, and which will again produce them.” – said Cato several thousand years ago (from The Battle for the Soul of Capitalism)

Here’s an interesting analysis from John C. Bogle‘s book “The Battle for the Soul of Capitalism

“When the S&P Index rose from 130 in March 1981 to 1,527 in March 2000, the return on investor capital, excluding dividends, was 13.8 percent per year. Earnings growth amounted to 6.2 percent annually, less than half of the return, with the remainder the result of a rise in the price-earnings ratio from eight times to thirty-two times. That increase alone accounted for 1,100 points of the 1,400-point gain, or 7.6 percent per year. If one were to attribute even a 5 percent corporate cost of capital as a threshold for stock option grant- a return a company might have earned merely by placing all of its assets in a bank certificate of deposit- corporate management could claim responsibility for an extra 1.2 percent per year.” (emphasis added)

So how does Wall Street manage to “meet” or “exceed” their generous quarterly guidance with such a high success rate? Here’s an example:

“In 2001, Verizon Communications reported a net income of $389 million and awarded its executives bonuses based on that amount. Net income would have been negative, however, had the company not included $1.8 billion of pension income. Thus, Verizon was able to use pension earnings to convert net income to profits, giving the firm cover to provide managers with higher bonuses [and meeting expectations, and keeping their stock options way high in the black]. It gets worse. It turns out that Verizon’s pension funds did not generate any real income in 2001; they had negative investment returns, losing $3.8 billion in value [What?!]. How then, could Verizon report income of $1.8 billion from its pension assets? The company merely increased its projection of future returns on pension assets to 9.25 percent, a move allowed under the accounting rules then in effect. Thus, the $1.8 billion in pension income used to move Verizon into the black did not even reflect actual returns generated by the pension funds. The pension income was simply the result of a change in the accounting assumptions. This certainly did not create any value for the firm or its shareholders.” (emphasis added)

OK, so lets do this simple math. They claim they made $389 million in net income, because of the $1.8 billion of magic pension fund money that doesn’t exist. This means they actually lost $1.4 billion, but that’s not it. They didn’t make $1.8 from pension, rather lost $3.1 billion in value for that fund.

Who ends up carrying those losses? The individual investors, fooled to believe a company is stable, holds the stock and takes the heavy losses when all the cards in the table are finally shown at once.

Quick Q&A: Could the value of a premium generic domain name depreciate?

January 25, 2008 2 comments

This is a debatable subject. The specific question I want to consider is: When a company accomplishes a dominant leadership position in an industry, how will the generic domain most descriptive of that industry be affected in its value?

Here are three examples to consider: – This is a powerful generic domain. Yet, it would be interesting to learn how many actual type-in visitors it generates for Barnes and Nobles. The reason – Amazon has become synonymous to books for most Americans. So, when people buy books, how much type-in traffic has Amazon taken from due to a powerful brand? – You probably said it in your mind before actually reading it – Perhaps their success was greatly influenced by fate/luck, when they tried to register as their website’s domain name and it had already been registered. This is why they had to shrink it into the catchy four letter word. Again, when you want to buy or sell in auction format, how likely would it be for you to type-in, rather than – Some lawyers are even trying to stop reporters from using the term “googling”, as search giant Google overshadows even the phrase “to search” with the increasingly popular phrase “to google”. How would you think this change has had an impact on the value of

If in these three cases you agree that the word actually lost value, rather than appreciated in value as a company grew into a leadership position of the industry, and you own a premium generic name for an industry in which a new company is growing to become a leader of that industry; then you should try to sell the domain name before the company establishes itself as the leader. Or at least for accounting/tax purposes, you should be able to begin a trend of depreciation from your asset as the company’s leadership position solidifies.