I’ve made considerable wealth in our Reaganite ‘Supplyside’ boom that lasted 25 years. I think it necessary for others to understand how fortunate we are in a decentralized economy. Gone forever is the need for any individual to rely, dare I say trust, big financial institutions. John Bogle, the author of Vanguard Group has performed an invaluable public service in addressing the significance of this change from a centralized command economy to a service based decentralized one based on technological innovation.
For those deeply interested in pursuing wealth creation I think it imperative for you to know certain contemporary principals that ought to both inform and guide financial strategy. Here they are:
1. Businesses are no longer dependent on banks. This is the dirty little secret in the creation of opaque financial instruments, its the attempt (partially successful) for banks to create dependency.
2. Know the Capital Structure (how they generate revenue) of the companies you pursue. This will effect their value and risk. Their are five parts to evaluating this dynamic movement: industry dynamics, the current state of capital markets, the current state of the economy, government regulation and social trends. When these factors indicate high risk, then any debt they issued is too much.
3. Know which businesses are vulnerable. Businesses with unpredictable revenue streams. Businesses with too much debt in a recession. Businesses must maintain flexibility, any debt is too much during credit constraints. For far too long companies have been leveraging up in a ratio of 30 to 1. That means they borrow money from the Federal Reserve to cover short bets. This is because most companies don’t have sufficient revenue streams to sustain themselves. Never follow any company that is highly leveraged, or dependent on commercial paper (debt).
4. Know that quantitative risk modeling is over! The standard used for underwriting are historically low. This is the ‘to big to fail’ mentality. Its dangerous.
Its simple: discover companies with good revenue streams, that have pushed out debt maturities, that continue to pursue a strategy of flexibility. THEN YOUR MONEY IS A SAFE INVESTMENT.
William Holland
William Holland 