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For What It’s Worth: Of Fads and Wealth – January 2015

In June, I will turn 65. This inspires me to stroll in the Memory Section of the Financial Boutique.

In the Fads section, Conglomerates are on the 1960’s shelf, Nifty Fifty Growth Stocks are on the 1970’s shelf, Junk Bonds on the 1980’s, Dotcoms on the 1990s, and Collateralized Debt Obligations on the 2000’s. They were hot sellers in their short heydays, but all went out of fashion because they were built on weak foundations – investors ignorant of the risks of seeking short-term return, accounting and financial engineering chicanery, trusting without verifying, and unrealistic expectations (greed, for short). Money fled to the next Fad at the first sign of trouble with the current one.

Now we come to the Innovators Who Met Real Needs shelf. On the 1960’s shelf are Mutual Funds and Certificates of Deposit. In the 1970s are Money Market Funds, Interest-Bearing Checking Accounts, and Real Estate Investment Trusts. In the 1980’s are Leveraged Buyouts. In the 1990s there stand the Microsoft Office and Intel mega-mansions, right next to Google, Facebook, and Skype in the 2000’s, and Twitter and others too numerous to mention in the 2010’s. Each product has stood the test of time because it has a sound, well-maintained business concept.

Our last stop is the Arbitrage shelf, which came into existence in the 1970’s after the deregulation of brokerage commissions and grew dramatically as telecommunications technology linked global financial markets. Check out the Options and Derivatives, Go Private-Go Public (Leveraged Buyouts and IPO’s), Mergers and Acquisitions, and Hedge Fund products. Although there is turnover among them, they remain hot sellers because there are always exploitable differences in valuations between markets and securities.

There is a great deal to learn from this tour:

  1. Fads driven by short-term hot money seeking high returns will not create long-term wealth; it will destroy it when risks come to fruition.
  2. Innovators who meet real needs with valid business concepts will prosper.
  3. So will investors who perceive and capitalize upon real value differences.

What does all of this mean for private equity – business owners and investors?

  1. Cosmetic and faddish accounting and financial manipulations cannot create sustainable value. Business owners seeking to sell often overstate “add-backs” to increase adjusted earnings and project unrealistic growth without sound business plans.  Perceptive buyers see through this.
  2. Long-term value creation requires true innovation – meeting new needs or meeting existing ones better, cheaper, and faster. This requires risk of capital, energy, and time.
  3. The difference between public and private stock price multiples and the existence of synergistic strategic buyers present major value creation opportunities.

Valuations play a part in all tax, transaction, and litigation matters. For additional information or advice on a current one, please do not hesitate to call.

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About Western Reserve Valuation Services LLC
Western Reserve Valuation Services LLC, based in Columbus, Ohio, is a leading provider of valuation services and financial opinions relating to corporate finance transactions, corporate tax planning and compliance, succession planning and wealth preservation, employee stock ownership plans (“ESOPs”), financial reporting and portfolio / fund valuations.  For more information, visit www.wesresvaluation.com or call (614) 448-3700.

Western Reserve Valuation Services is an affiliate of Western Reserve Partners LLC, a FINRA-member investment banking firm offering financial advisory services relating to mergers and acquisitions, capital raising and financial restructuring. For more information on Western Reserve Partners, please www.wesrespartners.com or call (216) 589-0900.

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