The Choice Of Entrepreneurial Path To Equities

A few years ago, I visited a domestic cable company with a British fund manager. When I interviewed him, I asked him how he felt. He asked me, "the market value of this company is now 600 million dollars. If god suddenly gave you 600 million dollars today, would you like to pay it in the bank, or would you like to buy the cable company in full?" or "do you want to spend this money on other things?"

I didn't fully understand his meaning at the beginning.

Recently, I saw him in Beijing, and he used it again.

First, the analysis of stocks by means of price earnings ratio is easy to be fooled by some small tricks in accounting affairs, such as depreciation and cost calculation, bad debt handling, inventory calculation, tax preference, parent company's "care" and cyclical industry fluctuations.

Second, it is easy to use DCF (cash flow discount) method.

Third, the vision of venture capital has reduced the impetuous thinking in the stock market.

Impetuous thinking has short term and fluke ingredients, and a small calculation with a "stir up" is behind the scenes, and the vision of venture capital forces you to consider long-term investment value.

With the method of venture capital selection, we can consider these questions.

First, are you willing to spend $1 billion to buy a TV company in full or you want to spend $2 billion to buy a whole house?

The choice of stocks from the perspective of venture capital forces us to consider the potential room for a stock to rise and fall.

If you buy a cable company for $600 million, the annual return is only slightly higher or lower than that of bank deposits or treasury bonds. Are you willing to work hard and buy it all over again? Venture capital funds are only willing to spend time and energy in projects of huge returns, or else the gains will not be worth the candle.

Second, choosing stocks from the perspective of venture capital forces us to completely abandon the concept of market price ratio.

For example, the net value of a company is US $500 million (assuming US $3.3 per share). This concept is meaningless, because the net value may represent the factory's scrap metal, or the waste in the warehouse, or the accounts which are difficult to recycle.

Think about it from another angle. If you start from scratch today, how much does it cost to build a similar factory (cable factory or TV factory)? The concept of "replacement cost" is very important, because you can redesign it on a blank sheet of paper to avoid the backward equipment, poor technology, poor image and bad habits of corporate governance.

The deeper question than replacement cost is: is the factory worth reset? How much is the IRR (internal rate of return) of such a plant? Is it worth the risk of replacement when compared with the earnings of bank deposits, treasury bonds, real estate or other investments? These problems are particularly important for industrial enterprises.

Because technology is advancing, equipment will become more and more advanced and cheap, and consumers' tastes are changing. Maybe the factory's products will be eliminated, so such factories should not be duplicated.

In the acquisition of a company, some entrepreneurs did not seriously think about replacement cost, and how much thought of greedy and fast thinking was in the running. Sometimes, the pride of "Conqueror" was in the making. Look, what a hero I am! So, in the Wan Wanqian case of global mergers and acquisitions, the success is often only a few.

Although mergers and acquisitions seem to be fast (of course, in China, the process is not fast enough, because of the approval of several departments), how much time does it take to build the same factory (i.e. duplication)? A year or two or three years? Is time saving worth paying so much difference to buy a company? Many people will argue that mergers and acquisitions have brought you opportunities, and you have missed opportunities after two years of delay. Many mergers and acquisitions in the world happen under this mindset.

However, if an opportunity is so fleeting, it may not be worth pursuing at all.

Others say that if you buy this company, you will be able to acquire its marketing network and brand.

As we all know, marketing network is a public property, and no company can control or influence the marketing network.

As long as it is worth investing, you will be willing to spend money on marketing network, and as long as your product can be sold, thousands of dealers will break your head and serve you.

It is believed that marketing network is the most abused and lacking precise definition.

Finally, brands are fleeting. Brand appraisers are generosity. They often value billions or billions of dollars for this or that brand. May I ask them, how much is the famous brands of tens of thousands of bankrupt companies now? Or, if they are rich, are they willing to spend so much money for these brands, and how much can a brand that can not bring cash flow be worth?