BogleFan510 wrote: ↑Wed Aug 26, 2020 12:38 pm
As I read the OP, a few ideas came to my mind that I am sharing to try to keep minds open to a different way of looking at market valuations for companies like Apple.
The value of equities, as reflected in stock indexes is a sort of proxy for the cumulative 'Global Balance Sheet' of incorporated assets held. The values also our aggregated assumptions about the future income to be generated by those assets, respectively.
If you look at the 'global balance sheet' of economic activity, there are some long term trends which have recently hit inflection points such that the wealth creation potential of the two 'sheets' above are dramatically changed. A few of the top trends are:
----- Capital markets are global. Money moves efficiently to its best use, faster and faster. This is a key factor behind the rapid economic rise of China. US, EU, and Japanese and Western capital flowed there despite political barriers, transforming the country. As Kenichi Ohmae argued in his book The Borderless World the late 80s, one can argue, large nation states have very little power over their own currency anymore.
----- Trading markets are defacto global. Incredibly efficient global supply chains are creating very efficient product and service markets. The impact for companies is an incredible pressure to 'win,' which is both harder and exponentially more profitable. This over time, wealth will concentrate in the winning global supply chain platforms. Well positioned companies will accumulate historically disproportionate wealth.
----- Information capital has emerged as increasingly important to corporate balance sheets. When I researched asset based value creation on the 80s and 90s, I classified the wealth creating assets of corporations within 5 categories: 1) physical capital (e.g. trucks, land); 2) financial capital (e.g. currency, debt instruments, stocks, related contracts), 3) human capital (e.g. skilled labor, education), 4) information capital (e.g. data, patents, process knowledge), and 5) brand/habitual capital (manifests as consumer and b2b habits and 'sticky' relationships, like those built via marketing strategies. Over time the relative value of information capital as the key to wealth creation has dramatically changed our economic system. Two interesting differences: information is fundamentally 'not scarce' as long as distribution systems like networks exist, and the `marginal cost of production' of information while formerly very expensive is exponentially trending towards zero. So in the global balance sheet, if you measure the percentage of the 5 asset types, trucks, people, money, etc are mostly similar, but the amount/value in information and brand/habit are ballooning. This is because if you have the information and brand edge, in an industry like Apple or Google's core markets, you print money. Your key asset has a marginal cost trending down and your market for sales and profit is global, sticky and trending towards monopoly power (if you can sustain it).
----- Commoditization of global markets. Where scarce assets create no proprietary advantages, competition for capital is driving scale economies and production efficiency to historic levels. Since information flows globally, the best ideas are allowed to rapidly create efficiency where inefficient production models used to be allowed to persist. This is taking time as political forces still get in the way, but over time seems inevitable.
So, I believe the valuations we are seeing reflect these changes in the global economy. Traditional measures such as 10 yr avg P\E are not the right way to look at a changing global supply chain and market landscape.
* Key industries will continue to globalize
* The most efficient global supply chains will trend toward monopolies
* Information intensive industries (if proprietary) be hugely profitable
(as they benefit from decreasing marginal costs of production and scale economies... e.g. web apps, pharma, software; hence the best investments, if among the winners)
* Industries without scarce asset advantages to protect profits will be squeezed by global efficiency forces, with value flowing directly to consumers vs becoming profits.
Just my thoughts as I read OP. My personal opinion is that bubbles are the new normal. I also believe that financial capital may not be a scarce thing in the future, so it may not matter as much as it has been in the past, which could be bad news for investors, but there will be a lot of wealth created for consumers, so we all should be ok. A lot depends on if the future' big winners' use public markets to finance their companies or not. That said, no other game in town to play.