Ensuring your business is ready for sale

The process of preparing a business for sale forces owners to look at their operations from a more objective point of view than they had done until that point. Many of the ongoing ‘house cleaning’ issues which don’t appear urgent in the day-to-day running of a company come to the fore when it’s time to find a buyer.

In the simplest terms, functional areas of a business which are better than the perceived industry standard will generate value for the seller. By the same token, areas which are even just a little below the perceived industry standard will do the opposite. In ensuring a business is ready for sale, the owner’s job is to maximize the former and minimize the latter.

Articulate the value of the firm

As much as a broker will sell a business as a ‘unique opportunity,’ there are thousands of similar opportunities out there which are competing for buyers. Sellers should be able to articulate the value of their business in three lines or less, just like startup founders. Understanding what exactly is being sold will also help focus on which areas require attention before the sale.

Detach yourself (and your family) from the firm

Take yourself out of your firm and what remains is what the buyer receives. Among other issues, this means ensuring that recurring revenue is not based on personal contacts, cutting personal expenses from the income statement, extracting personal assets and liabilities from the balance sheet, and removing offspring from managerial positions.

Clean up the balance sheet

There are often a number of quick wins for sellers of firms to be found on the balance sheet: reducing accounts payable, liquidating under-utilized or under-performing assets and using the proceeds to pay down some of company’s debt are just some examples. It should also be clear to the buyer from reading it what their CAPEX requirements will be on acquiring the firm.

Consider your people as assets

With services accounting for over 80% of the US economy, a firm’s employees are more important than ever before. This can be one of the hardest areas to get right, as sellers seek to find a balance between their loyalty to long-term employees whose skill set may be outdated, and ensuring that the buyer is acquiring a team which can drive the firm by itself.

Where possible, renew contracts

Buyers like to see stable cash flows projecting into the future, and often that means recurring revenues from existing contracts. Wherever possible, sellers should ensure that existing contracts have been renewed for a minimum of 24 months, (even if that requires a small discount on the current terms)

Transparency about the past, present and future

Being transparent in a sale means showing the buyer everything, warts and all. This includes having accurate historical financial statements, information on previous or pending litigations, and why a sale is being sought. It also means being honest about the future prospects of the firm - buyers work on the premise that if something seems too good to be true, it usually is.

Identify weaknesses and deal with them

Closely related to the previous point is identifying weaknesses - and dealing with them as best as possible before the business is put on the market. Sellers should ask themselves, ‘what are the three biggest weak points of this business?’ and then see how they can be resolved. The better the resolutions, the more bulletproof the sales pitch. 

Conclusion

Aside from anything else, it’s good policy for owners and managers to maintain their company as close to a ‘ready for sale’ state as possible. This not only creates value for the owner, it also provides them with a increased flexibility in terms of timing should they wish to sell for any reason at short notice.

It’s no coincidence that companies which register strong buyer interest are also those which have a clear strategic direction, a strong internal culture, a talented team of professionals, positive financials and a comprehensive set of corporate controls in place.

The Monotony of sensible Investing

This is not another article about rubber ducks

There’s something glamorous about investing in the stock market that perhaps no other type of investing possesses; you can make a fortune on selling rubber ducks (Roman Abrahmovich made his first million selling rubber ducks) or ice-cream (Duncan Bannantyne made his first million from the back of an ice-cream van) but somehow, it doesn’t have the same caché.

It’s as if there’s something smart about stock investing that other areas don’t quite have, that appeals to us. Maybe it’s because when someone who works in stocks and shares says something with authority, we listen. Who doesn’t want the ability to hold someone’s attention, for them to highly regard your opinion on areas as serious as the economy and put their money where your mouth is?

Go back a step.

When you’re investing in the stock market, you’re looking to get a return on an investment. The rest is window dressing. Holding someone’s attention, those blue shirts with the white collars and all the rest of the trimmings have nothing to do with good investment and it’s important not to lose sight of that. An industry has been built around the actual business of sensible investing to distract you.

The best offices in London are held by investment banks. Here’s a little secret: you’re paying for the office as soon as you walk in the door to talk to them. Nobody is going to tell you that they’re not successful. They’re very successful – at betting on the right way stocks that are going some of the time and convincing clients to pay out large fees all of the time.

If proof of this were needed, all you have to do is look at the offices of Warren Buffett, widely regarded as the best investor of all time. Rather than the shiny metal and glass wonder in the heart of Manhattan that you might expect, it instead stands as an ugly 1970s monolith in Omaha, Nebraska – a part of the American Midwest that would be unknown to most were it not for his investing prowess.

Berkshire Hathaway Headquarters

He did it all, first from an office in his house attic and then in a plain office building in his hometown where the rents were low (again, showing a focus on investment and nothing else). What Buffett understood – and is constantly at pains to point out – is the difference between price and value: “Price is what you pay. Value is what you get.”

Enter the Media

The media are often accused of spinning political stories and it’s probably justified. Strangely, rarely are they accused of spinning economic stories. To be fair, they don’t do it intentionally – we all do it. But headlines like, “stocks to watch out for in 2015,” “2015 could be a good year for stocks” (note: the heading said “could be”), and “where are the next growth industries?” are commonplace.

In the same way that the media convinces some people through home design shows that a house can be bought, refurbished and flipped for a 15% profit in three months, they often, unwittingly do the same with the stock market. It goes with the territory – if you’re writing an article, it’s easier to start with, “here are ten hot tips,” than, “this one is tricky to call – I’m really not sure.”

If you are investing in anything, should it be shares, bonds, real estate or other physical assets, use the media by all means; but use it for information. Good investors trade on good information. Don’t use it as your shepherd. When the Sunday Times tells you in its Money section that it has found the best shares to invest in for next year, pinch yourself and think that 800,000 other people bought the same newspaper that day. If 1% of the people listen to the paper’s advice, 8,000 people will go out on Monday morning and buy the stock.

Oh, it will go up in price alright.

This is what we mean by not using the media as a shepherd. It should be looked at (and hopefully will remain as) a source of timely, relevant and accurate information. Beyond this, you will have to use the information wisely in tandem with specifics of each company, fund or index that you wish to invest in. That doesn’t make a particularly good headline, but it’s true.

Fund Management

The civil service offer better value for money than most fund managers. And at least the civil service provide us with reliable data on their (sometimes impressive) performance. Fund managers invest in shares on your behalf, warning you beforehand, “shares can go up as well as down.” Think about that for a moment. The shares can go up as well as down. And they’re getting paid for that nugget.

There is a trick in the fund management industry whereby funds of shares that aren’t performing well are killed off. Therefore, we have what is known as “survivorship bias:” every one of the funds is doing well, because all of the ones that weren’t doing well were killed off. This is the finance equivalent of showing someone you got an “A” in an exam as proof that you got “A”s in all of your exams.

The most bizarre thing of all is that they get handsomely paid for this. Again, the shiny office comes out. The ads for fund management firms appear daily and weekly on reputable publications like The Economist and The Financial Times (even as the pages inside the covers slate the industry), and the process goes on. You would think it couldn’t last but it’s already lasted so long that it seems to have its own momentum.

Investing in shares is not exciting

Investing in shares is not exciting. It’s worth repeating the sub-heading. One of the images that trading on the stock market is of a man or woman looking intently at a computer screen when somebody calls and says, “Buy! Buy! Buy!” He or she subsequently buys the shares and makes a million on the trade. In fact, that is so unrealistic that it has probably happened about five times in Hollywood films.

Most stock market investing is a case of buying under-valued shares in sound companies and waiting a few years to see the return on the investment. And before that return comes, there may be a bad year – or a year with no dividend return – where you begin to think you made a bad choice. But if it was a good choice in the first place, then it makes sense to wait.

The NYU Professor and investor, Aswath Damodaran, spoke to students about the value of waiting. He gave the example of an economic crash in an emerging market (which are almost always more volatile). In each of those countries, there are companies that depend almost entirely on the country’s wellbeing (such as, say, domestic supermarket chains) and those that don’t (such as those that have a lot of international trade).

Damodaran gave his students the case of Embraer as an example of the latter. Embraer is the largest airplane producer in Brazil and 95% of its output goes to the United States. So what happens if the Brazilian economy goes belly up tomorrow? Hopefully, it doesn’t come to pass as people would suffer. Embraer would be shielded better than most though – 95% of its money comes from the United States. Effectively, it’s depending more on the well-being of the US economy than the Brazilian economy!

So, when the economy crashes, all the international funds get out of Brazil (at the same time as telling their clients they saw this coming), pushing down the value of the stock market. The price of Embraer goes down as well. But its cash flow was just the same as it was before, because Americans are still buying their airplanes. It’s a good example of using the media for information rather than as a shepherd.

Damodaran notes that for a while (maybe up to a year or slightly more), the share behaves erratically but after waiting a few years, he says he did well on trades like this. Again, even in a situation where there was a world-class professor and sometimes investor involved waiting it out paid off. The company retained its cash flow and its shareholders were rewarded.

Cash Flow

At the beginning of this document, we stated that investment is about getting a return. The cash flows are the return. Not the revenue. Not the EBITDA or even the net income. These are effectively accounting tricks. In fact, accounting can tell us that a business is still a going concern when it has no cash flows. EBITDA and net income can be doctored. Try doctoring how much cash a business has.

It is worth hammering home the difference between revenue and cash flow again and again. Revenue is the sales of a business – the headline figure. Bizarrely, everyone is more familiar with the revenue than the cash flow of most companies. When people say, “Google made X billion dollars last year,” they’re almost always talking about revenue.

Well, what Google actually made was the cash flow (also, incidentally, not a small amount for Google but even for them, always smaller than the revenue). The cash flow is what’s left after everything else has been paid: salaries, tax and all the rest of it. As an investor, it’s the figure you should be looking for; the faster you get to the cash, the faster you will see a return on your investment.

The importance of cash flow was underlined recently when the debt of Twitter was given a junk rating. Ratings agencies – paid to value debt – said that a company as well-known as Twitter, with how ever many daily users were unlikely to give your money back if you borrowed it to them. Why? The reason given was that they aren’t generating enough cash flows. Nothing else – just the cash flows.

Risk

We commonly think of companies as large stable non-risky entities that have been and will be around forever. In our collective defence, they’re happy for us to think this – it’s in their interest. Why? Because companies pay for risk on the money they loan, just like everyone else does. The more stable they can appear, the cheaper the money they borrow will be.

But companies aren’t stable. Incredibly, Coca Cola lurched towards bankruptcy in the 1980s. The term “Kodak moment” might be with us forever but the company that the term is based on certainly won’t be – they went bankrupt a few years ago. They were world leaders in their industry for almost a century. Most children these days wouldn’t know what a film is, never mind how to reel one. So much for stability.

The Encyclopaedia Britannica was a feature in rich people’s houses for decades as they sought to educate their young. It stopped selling when Microsoft put Encarta Encyclopaedia on a CD in the early 1990s. Who could topple an encyclopaedia on a disc? Well, it lasted about ten years. Wikipedia came along and now Encarta is a distant memory.

This is not a parable for the sake of it. The stock market is constantly asking you to invest in firms, which are market leaders, have a seemingly unassailable lead over their rivals or an industry monopoly. And yet, firms always fall. And with them, they take investors’ money and the vast majority of their creditors’ money (who clearly undervalued the debt).

The risk is ever present. Even if companies don’t fail, they can make bad investments, which kill money. They make the wrong choices – who would have bet on Facebook taking over when MySpace had a clear lead? At a price of $580m, Rupert Murdoch called it one of his best ever purchases. In 2011, he sold it for $30m. Murdoch generally isn’t one to throw away money.

Shares are risky and anyone looking to invest in them should be very aware of that.

Past Performance

We have purposely left the biggest downfall of new stock market investors to last. There’s something about an upward sloping curve that we all love. It says success, money, good investment. Well, actually, it doesn’t say good investment. It says well invested. The difference being that the performance was in the past. The one thing all stock charts have in common is that they’re all in the past.

It’s startlingly obvious but it catches so many people out and despite hundreds of years now of stock market existence, people are still falling for it. Looking at an upward sloping chart and thinking that it’s a sign that the share is a good investment is like putting a bet on Nottingham Forest to win the Champions League because they won it twice at the end of the 1970s.

Remind yourself again and again that the graph of a share shows the investor expectation at any one point in time about what the future performance (i.e. the future cash flows) of that share will be. It’s constantly going up and down because nobody can say with 100% certainty how cash flows will be, but it means that the current price is about as good a guess as we can make.

That means that the current share price – in as much as we can tell – is accurate. It’s worth no more and no less. If you think it’s undervalued, go ahead and buy it. But you’re effectively saying that everyone else in the market is wrong about the price and you’re right. And you could be right. But at the other side of the trade, the guy selling you the share will be wrong about the price. So, really, it’s not easy.

Conclusion

The purpose of this article was not to scare anyone away from investing in the stock market. We don’t think we could, anyway. Rather, it was a call to sensible investing and to be aware of the dangers and pitfalls of investing on the stock market – not just for novice investors, but for everyone. And even armed with good information, sensible investors with good intentions have been badly burned.

The massive industry that has grown around the stock market (including the companies that make up the stock market themselves) doesn’t get paid if you don’t invest on the stock market. So bad news is often short on the ground. This article is just an antidote to that. We have attempted to play the role of devil’s advocate and not just for the sake of it.

The stock market can still be a highly worthwhile investment, when you are armed with the right knowledge. Put aside emotions, biases and narratives that you want to be true and look at investments with cold, unemotional rationality. Anyone who has made money on the stock market over a sustained period has done it this way. Forewarned is forearmed. We wish you successful investing!

Establishing Your Company Value: A Guide for Startups

Note from author: The content in this article isn't quite in keeping with the rest of the content on Sober Analysis as it was written for an entrepreneurial blog. Nevertheless, there are some aspects which hold true to the content, even if the tone isn't right. For that reason, it has been included here with the other articles.

Establishing company value is exactly what a venture capital firm will be doing when they look at your firm. How do they do this? The first point to note about valuations is that there is no exact value for a firm. The value attributed to most firms is a combination of available data, methodology and unfortunately…opinion.

Why unfortunately? Well, it can actually be a good thing or a bad thing. We say “unfortunately” because it means that you can never quite pin down the exact value of your firm. But this can be a bad thing or a good thing, when you think about it; now, nobody can tell you that you’re wrong – provided that your figures are at least justifiable.

Let’s get going then. The first thing to note is that the value of your firm is the sum of all its future cash flows. Beyond how good your idea is (and it probably is pretty good if you’re already reading this), beyond how many competitors are out there and beyond your expertise in IT: how much hard cash is this company going to put in the pockets of its owners?

And not just for the next 12 months, but for the duration of the company’s life. This doesn’t seem so easy to pin down, but relax, the methodology to finding a ballpark figures isn’t that difficult. Once you follow a few short steps, which we are going to outline here, the valuation will begin to look clearer.

There is just one complication with valuing start-ups: no track-record to work with. So, valuing stable firms with a history of financial statements and lots of comparable firms is a piece of cake. Valuing a start-up early in its life-cycle is trickier because you’re guessing more figures than you would be if you already had a track record.

Think of it this way: who would have guessed in 2004 that in a market that included MySpace, Bebo, SmallWorld, FriendsReunited and others that Facebook would become an $80 billion company? That’s the kind of issue you’re dealing with when trying to value a young tech start-up.

Okay, let’s get going.

The most important things you have to estimate in this process are the cash flow and the rate at which this cash flow will grow. Right now, there’s a good chance you’re not getting any cash in. Don’t worry – this is a part of the process. Even Larry Paige and Sergey Brin went through this phase at the beginning with Google. You’re not expected to make cash at the beginning. If you do, it’s a bonus.

How do I calculate cashflow?

This question is straightforward but make sure that you understand it. The cash that we’re looking for is not the amount of cash that comes into the business. This is revenue. This is an extremely important point to note at the outset. Too many entrepreneurs fail off the bat because they don’t grasp the difference. Don’t fall into the trap of confusing the two.

Revenue is what you get when one of your clients pays you for the product or service that you’re offering.

Cashflow is what remains after you’ve paid for your rent, the salaries of your employees, office supplies, the internet bill, your ISP, that doughnut on your desk and anything else that needs to be purchased. The residual is cash.

Note to startup entrepreneurs: organize your cash better than this.

You want to know why Microsoft is worth so much? Because they make cash. A lot of it. Why is Google worth so much? The same reason. And Facebook? Ah…you see…there’s where the second part of the equation comes in. Facebook makes cash. But it is worth so much because investors believe that the cash it makes is going to grow substantially.

It makes sense, right? They’re not making massive amounts of cash now, but the idea is that they soon will be. Just like your small business. It’s not in profit right now – but it soon will be. Soon, you’ll be swimming in cash. The more your investors think they’ll be swimming in cash with you, the more they’ll pay for your business.

Your second challenge is to calculate growth. Don’t worry – as we’ve said before, nobody can get this exactly right. Even investment bankers who have been working in valuations for 30 years can only get an approximation. Your job is to make it justifiable. Your cash flow is going to grow 50% this year? Sure. Show us how.

Large growth figures aren’t at all unusual in start-up firms. In fact, they’re expected. So if your growth figures for 40% for next year, 40% for the year after and 30% for the year after that – don’t worry. You’re not being ridiculous. By the sounds of it, you’re probably even on the right track.

Just be aware that high growth can’t last forever. Think about the logic behind this: you reach your target market, get a good market share and where do you go from there? You’re just supplying the same customers over and over, right? You can probably release a premium version of your product or service and gain that little bit more each year. In this way, it’s useful for a start-up to think of two separate types of growth.

“Wait – two separate types of growth? Growth is growth, right?”

Absolutely correct! And all growth is good for your firm – never have any doubt about that. But for the purposes of your valuation, it’s useful to think about two types of growth: growth in the next five to ten years (which will probably be double digit each year) and then a figure for long-term growth (once your company is established, it won’t manage double-digit growth figures each year).

Hopefully, this gives you an idea of where you’re going with this. Right now, we’d like to give you an example of what this all looks like in practise. Don’t worry if you’re not familiar with accounting terms – nobody expects you to be. You’ll soon grasp that all financial statements look very alike, whether it’s a small start-up or a multinational giant. The only difference are the figures (naturally enough).

Here’s a small sample of what you can expect:

First of all, make sure you can establish what your free cash flow looks like. You need to get a grasp of where money is coming in and going out and where you expect it to come into the business and flow out in the future. Work out this figure for as long as you can into the future. You know this year’s cash flow and next year’s should be reasonably easy as well. The year after is more difficult to foresee and so on. As a general rule of thumb, you’ll need the next six years to make the valuation.

The first five years will look something like this:

E(CF) is shorthand for “expected cashflow.” If this is negative, write it in the equation as being negative – no problem. The (1+r) part below the line is what’s known as a “discount rate.” This isn’t easy to explain in layman’s terms, so if you’re finding it hard to grasp the meaning of it, don’t worry. There’s also a wealth of material online about the discount rate and what it means. Basically, it’s a measure of how risky your business is.

The good news is that as usual, nobody can provide an exact number for this. For a start-up, this figure is just about always over 30%. It’s a much higher number than for other types of companies because start-ups are much more risky. As time goes on, this will lower – don’t worry.

The final part of the equation is the horizon value or the terminal value. Remember what we said about two different growth rates? –About one being a high growth rate for the short term and a second, lower growth rate for the long term? The second growth rate is dealt with by the terminal value, which looks like this:

Again, the CF represents the cash flow. This time, it’s the cash flow after the cash flow you forecasted in the previous equation. So, if you went to year 10 in the first equation (which would be ideal), this second CF is year 11’s forecasted cash-flow. If you went to year 5 in the first equation, this second CF would be year 6’s cash flow. Think of this second equation as what happens later. And remember it’s just an estimation – something you can justify.

Below the line is the discount rate (which will be a lot lower here – use between 10% and 15%) and the constant growth rate into the future. What do you predict your company to grow at each year, on average, in the long term? Again, difficult to say! But the industry standard is around 3% growth per year (in line with the economy in general). If you say 3%, nobody will take you up on it. Therefore, below the line you have 10% - 3% (0.1-0.03).

Now it’s just a matter of adding the number you obtained from the first equation to the results you obtained from the second equation. See what value shows up. Does it look realistic? Be honest with yourself here. Lots of people move the numbers about until they find a valuation they like. That’s not the way this works! You need to be as honest with the numbers as possible and then and only then will you find the value of your company. Again, don’t worry if this all seems complicated. There’s so much material on the internet (and videos) that will allow you to play around with figures that you’ll soon have a much better handle on what’s happening!

The Media and the Bitcoin Bubble

The noise that surrounded Bitcoin since 2011 has intensified over the past 2 years. Everybody wants their say on where the price of this virtual currency is headed; advocates mention millions of dollars while far less optimistic onlookers suggest pennies. It is typical of what happens when something has no intrinsic value and yet everyone wants to name their price for it.

Disregard the hype surrounding “money 2.0” and you are left with scarcely little. Bitcoin is less of a digital currency and more of an ongoing modern parable about behavioural finance. Right now, there is only one certainty for Bitcoin: books about the irrationality of its hikes in price are being penned at this very moment in time for next Christmas.

A book they would do well to match on the subject is “Irrational Exuberance,” by Nobel prize- winning economist, Robert Shiller[i]. In a chapter covering the news media, he writes, “The history of speculative bubbles begins roughly with the advent of newspapers.” The relationship between the media (in particular, newsprint media) and economic bubbles is thereafter laid out by Shiller.

The Bitcoin phenomenon is almost certainly one such media-driven bubble. There appears to be a strong correlation between the frenzy created by the media and the price of Bitcoin. Unfortunately, much of the noise has been generated specifically by the financial media, who seem to have learned little from recent crises. For some people, it seems that virtual currency is just too much of a good narrative not to follow.

Word on the Street

Bitcoin received its first mention in the pages of the Financial Times of London on June 6, 2011[ii]. Interestingly, it was referred to in the title of the article as “virtual money,” which seems a far more accurate means of describing it than “digital money,” or “money 2.0.” One bitcoin could be purchased that day for $8.

Three days later, on June 9, 2011, the Wall Street Journal published an article, “Bitcoin: Online Currency Taking Off.”[iii] Bitcoins were already trading at $15 and were climbing. In the same article, the journalist pointed out to readers, “the thing to note is that Bitcoin has real, and actual, value;” Confusing a price with value: the hallmark of a bubble

By June 13, 2011, the price of Bitcoin had risen to $28 – a bullish market by anyone’s standards. In Just seven days, its price had risen 250%. In the same period, the S&P 500 fell from 1,286 to 1,271 – a fall of 1%. Granted, it’s not as good a story as that of Bitcoin’s meteoric rise, but at least the fall was probably more closely related to fundamentals.

Other media were also getting in on the action. On June 20^th 2011, The Bloomberg news channel ran a report on “what some are calling the money of the future.”[iv] Therein, we were told that “you can speculate” on Bitcoin. The piece finished by interviewing a man making Bitcoin ATMs – because presumably his venture on Betamax videos didn’t pay off.

“This time it’s different”

Headlines, articles and general financial media analysis of Bitcoin’s ascent show some outlets to be more culpable than others; what the majority of them were guilty of is giving weight to a phenomenon, which frankly, doesn’t deserve it (speaking from an economic perspective, at least).

One example is how much of the coverage features a supposed technology guru, who is understandably excited about the programming behind Bitcoin. The natural impluse for an investor who knows no better is to make an association with the last hugely successful tech shares they let go too late to invest in.

Secondly, coverage of Bitcoin frequently uses the expression, “money 2.0,” suggesting that this is the next generation of money – the internet generation. What investor would want to miss out on the next generation of money? Nobody wants to be the guy in the marketplace that was using leather money long after everyone else had changed over to paper.

Plus ça Change

Something else was happening, which could have had an effect on the price of Bitcoin: stock prices were hitting pre-crisis levels. In 2012, the S&P 500 continued its steady rise until it reached a record high at the beginning of 2013. With stocks touching a peak, it might make sense to “get in on the ground” elsewhere. Looking around for inspiration, investors might have been struck by the new virtual money that everyone seemed to be talking about.

At around the same time that the S&P 500 was approaching its pre-crisis peak, Bitcoin was receiving increasingly regular media coverage. A study conducted at the Charles University in Prague has shown the relationship between searches on Google containing the word “Bitcoin” and the price for a single bitcoin over the period between June 2011 and May 2013[v]. The studied correlation seems clear (see figure 1).

Figure 1. Relationship between Google Trends Searches and Bitcoin price

                                                                        Source: Dr. Ladislav Kristoufek   
 

Although causality is impossible to prove, even someone ardently against the idea that the media has played a significant role in the Bitcoin bubble would find it hard to reject the relationship between the above variables. The correlation has remained strong until the time of writing at December 2013.

The year 2013 finished as it begun – with more stories on the new form of money that was going to make you and yours rich. On December 26^th, Forbes.com ran a graphic with the headline, “How you should have spent $100 in 2013 (Hint: Bitcoin),”[vi] as value investors everywhere looked on in bewilderment.

Conclusion

Media commentators play an important role in bringing efficiency to capital markets. The information they provide is quickly contained in asset prices and allows investors to make better informed decisions. They cannot always be expected to get it right. That said, they have played a large role in the Bitcoin pricing bubble that at the time of writing, continues to expand.

The problem is that when prices become too remotely distant from value, investors get hurt. Certainly, Bitcoin has made millionaires and might make many more. As the renowned Professor of Finance, Aswath Damodaran, points out, “you can be right in your assessment of value and go bankrupt being right.”[vii]

When media commentators use the expression “money 2.0,” we should stop and ponder for a moment. Money went through its second incarnation several thousand years ago. To say “money 2.0,” shows a lack of knowledge of the complexity of money and how it got to here. And then, in speaking of the forms that money took – perhaps their advice should be taken with a pinch of salt.

Sources

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[i] Shiller, Robert J, 2000. Irrational Exuberance. Princeton University Press.

[ii] http://ftalphaville.ft.com/2011/06/06/585756/virtual-money-from-real-central-bank-mistrust/

[iii] http://blogs.wsj.com/tech-europe/2011/06/09/bitcoin-on-line-currency-taking-off/

[iv]http://www.bloomberg.com/video/71141386-virtual-currency-bitcoin-rises-in-usage-value.html

[v] Kristoufek, Robert, 2013. Bitcoin meets Google Trends and Wikipedia: Quanitifying the relationship between phenomena of the Internet era. Scientific Reports 3. Article 3415.

[vi]http://www.forbes.com/sites/kashmirhill/2013/12/26/how-you-should-have-spent-100-in-2013-hint-bitcoin/

[vii]http://aswathdamodaran.blogspot.com.ar/2012/06/activist-value-investing-be-your-own.html