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Stocks and Assets (Part 1)

28 September 2007 - Features - Editor

Asset values of stocks are notoriously fickle, and are in constant flux throughout the typical trading day (Net Asset Value, 2007). Azim Premji, founder of one of India’s legendary Information Technology companies, when quizzed about his billionaire status on a day when the local stock market had experienced an exceptionally sharp rise, commented on the fallacy of reading too much in to the transient worth of stocks.

Stocks have durable and real worth, but such numbers may be entirely at variance with a particular trading day’s general sentiment. Should we blame the media for the sensational accounts of bull and bear moves with respect to the stocks we own? The blame game is however, rarely productive, so it may be best to reflect factually on the statuses of portfolios, rather than to be swept away by tides of cacophony.

Liabilities do impact the real values of stocks, but intrinsic worth has to be built around assets. Executives and owners, who apply our funds, have crucial responsibilities in acquiring material resources for companies, so that wealth is generated legally, and in sustainable manner. Unfortunately, the acquisition values of assets are the ones recorded in books of account, whereas their real worth keeps changing. Owners of stocks are fortunate when assets such as land and buildings appreciate well over their recorded values, but there are always risks that working capital entries are over-stated: inventories with limited shelf-lives are typical examples.

Safeguards for Acquired and Merged Stocks

Auditors are supposed to check all warehouses and other locations, as well as lists of debtors, to ensure that working capital is reported correctly by companies in which we hold stocks. The sub-prime scandal shows that they may not always do thorough jobs! Replacement values of fixed assets are not required at all, and the depreciated ones may be entirely misleading. The dice is heavily loaded against minority holders of stocks!

A change in corporate structure after a new entity takes control of an enterprise, needs careful review (Bennett, and Lippert, 2007). Management teams may announce severance of parts of a supply chain, which can affect a corporation’s cost structure negatively in the long run. Moreover, prices realized by sales of assets can be open to question if the antecedents of the acquiring party are unclear. Watch out, if one of the companies in which you hold stocks, gets acquired or merges with a former competitor!

Stocks of entities which have been owned by the State may prove to be most attractive for investors, though some of the inherent advantages enjoyed by such bodies may be lost following transfer of stocks to private hands (Ramanadham, and Bennett, 1997). Investors love to get their hands on stocks of former State organizations, but watch out lest you get sold lemons! Columbia is a powerful example of how reported asset values of companies in countries with strange forms of governance can disappear almost overnight!

Stocks and Assets (Part 2)

 


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