Valuation: A Shareholder’s Dream

The Shareholder Activist - Valuation: A Shareholder’s DreamWe all seem to have a natural talent for knowing what things are worth, and what we are willing to pay for them. Historically, however, it has been well documented that this process can go awry. Bonkers in fact.

Tulipmania” was coined when a “rare” bulb had the equivalent value of 12 acres of land in Holland (a very small country) in 1637. Some of us are content to drive a Subaru, others must drive a Range Rover. Value is in the eye, wallet, and “self-esteem system” of the beholder. The Mississippi Scheme-Bubble (John Law, 1719), and Tulipmania are among the first and the most studied “bubbles” in modern global finance.

In our culture it is easy to get caught up in, and be seduced by, trends and bubbles. If one is a collector and an enthusiast; and if you’ve ever been to at auction at Sotheby’s or Christie’s in New York then you have experienced “auction fever.” The excitement builds and “value” is created when the hammer drops, and you’ve paid a hefty price for an object that you have fallen in love with which you must have. The fever is literally a manifestation of a neurotransmitter surge in our brains. Oxytocin, serotonin, and dopamine are the “culprits.”

Shareholders are especially sensitive to valuation, as they should be. They need, and want, to believe that the companies they co-own have true value. At auctions, collectors pay premiums to indulge their needs and fantasies. Proper corporate stewardship should synch with that most sacrosanct of stipulations: fiduciary responsibility on a corporate level. This type of responsibility bolsters value.

For further study, perusal of Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds (1852) is highly suggested.

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