Sovereign Man Notes From The Field By Simon Black
September 25, 2015
Sovereign Valley Farm, Chile
I'Ve Finally Calculated The Value Of A Dollar
A few days ago a young entrepreneur came to me with her big idea for a business.
This happens a lot, sometimes even 3-4 times per week.
And while our selection rate is very low, I pay attention to each and every pitch in our effort to find the real gems, because, in my view, a profitable private business is one of the best assets you can hold.
~~~
September 25, 2015
Sovereign Valley Farm, Chile
I'Ve Finally Calculated The Value Of A Dollar
A few days ago a young entrepreneur came to me with her big idea for a business.
This happens a lot, sometimes even 3-4 times per week.
And while our selection rate is very low, I pay attention to each and every pitch in our effort to find the real gems, because, in my view, a profitable private business is one of the best assets you can hold.
~~~
Unlike stocks, the value of a private business (outside of the ‘tech’ sector) is generally based on what really counts: profit.
Private businesses can do well in both inflation AND deflation; and they aren’t subject to the whims of central bankers.
It’s a tremendous asset class to own, and our team spends a lot of time sniffing out the best deals. Hers was not one of them.
I listened patiently as she went through her pitch, and at the end she offered us a special opportunity to buy 20% of her business for $250,000.
There was just one problem.
She didn’t have a business. There were no employees, no team, no product, no prototype, no design, no revenue, no testing, no website, no assets.
She didn’t even have a company or a bank account.
She had nothing but an idea.
And based on her calculations, she thought her idea was worth $1 million.
(This is what’s known as a ‘pre-money valuation’. The ‘post-money’ valuation would be $1 million plus the $250,000 investment capital = $1.25MM. We would own 20% of that, or $250k/$1.25MM)
Yes, it’s true that a great business is the best asset you can own.
But as I tell students at our annual entrepreneurship camps, the most important aspect of any business is execution-- the ability to turn an idea into a plan and methodically bring everything to life.
You can have the most fantastic idea. But without execution, an idea is worth absolutely nothing.
Needless to say we passed on the deal.
But the conversation was a clear reminder of how little value there is to money anymore. There’s simply too much of it in the system.
Central bankers have spent years printing trillions of dollars. In the United States, the Fed’s balance sheet is 5x bigger than it was seven years ago.
But it’s not like the US economy is 5x bigger. Or 5x as much productivity.
Or 5x as many goods and services.
No, there’s just 5x as much paper floating around the financial system.
(Though technically not even paper. Our money is electronic-- a series of ledgers in bank databases, as if your life savings is represented in a single cell somewhere on Janet Yellen’s spreadsheet.)
Over that same period, they’ve decreased interest rates to effectively 0%.
And after yesterday’s speech, the Fed has even opened the door to making rates negative.
Just consider what that means.
Money, like anything else, has a price. When you want to consume a hamburger, you pay the price of a hamburger.
If you want to consume money (i.e. borrow to buy a house or build a factory), you have to pay the price of money.
That price is the interest rate.
By setting interest rates at zero, the Fed is telling the world that money is free, i.e. that the US dollar is worth nothing.
(Negative interest rates imply the dollar is worth less than nothing.)
After my conversation with this young entrepreneur, that seems abundantly clear.
With no execution, her idea is fundamentally worthless. But she wants one million dollars for it.
So based on my math, if $1 million = her idea = worthless, then the value of a single US dollar is 1/1,000,000 of worthless.
Look, we’re in a period right now where US dollars are relatively ‘strong’... against oil, foreign currencies, etc.
People often think that when something is strong, whether a nation or a currency, that it will be strong forever.
This is a major fallacy.
It wasn’t even four years ago that the Japanese yen peaked at 76 per US dollar. Today it has weakened to 120.
In July 2008 the euro was worth almost $1.60. Now it’s $1.11.
It’s all part of a cycle. Currencies, like nations, rise, peak, and decline.
That’s absolutely going to happen to the dollar as well, especially when so much objective, everyday evidence suggests that it is excessively overvalued.
What this means is that if you are holding US dollars, you have a once-in-a-decade chance to trade something that is fundamentally worthless and objectively overvalued, for something that is real and undervalued.
In our case, we’ve loaded up on productive farmland here in Chile.
We’re also working on buying a profitable business in Australia at a time when the Aussie dollar has been punished.
Private businesses can do well in both inflation AND deflation; and they aren’t subject to the whims of central bankers.
It’s a tremendous asset class to own, and our team spends a lot of time sniffing out the best deals. Hers was not one of them.
I listened patiently as she went through her pitch, and at the end she offered us a special opportunity to buy 20% of her business for $250,000.
There was just one problem.
She didn’t have a business. There were no employees, no team, no product, no prototype, no design, no revenue, no testing, no website, no assets.
She didn’t even have a company or a bank account.
She had nothing but an idea.
And based on her calculations, she thought her idea was worth $1 million.
(This is what’s known as a ‘pre-money valuation’. The ‘post-money’ valuation would be $1 million plus the $250,000 investment capital = $1.25MM. We would own 20% of that, or $250k/$1.25MM)
Yes, it’s true that a great business is the best asset you can own.
But as I tell students at our annual entrepreneurship camps, the most important aspect of any business is execution-- the ability to turn an idea into a plan and methodically bring everything to life.
You can have the most fantastic idea. But without execution, an idea is worth absolutely nothing.
Needless to say we passed on the deal.
But the conversation was a clear reminder of how little value there is to money anymore. There’s simply too much of it in the system.
Central bankers have spent years printing trillions of dollars. In the United States, the Fed’s balance sheet is 5x bigger than it was seven years ago.
But it’s not like the US economy is 5x bigger. Or 5x as much productivity.
Or 5x as many goods and services.
No, there’s just 5x as much paper floating around the financial system.
(Though technically not even paper. Our money is electronic-- a series of ledgers in bank databases, as if your life savings is represented in a single cell somewhere on Janet Yellen’s spreadsheet.)
Over that same period, they’ve decreased interest rates to effectively 0%.
And after yesterday’s speech, the Fed has even opened the door to making rates negative.
Just consider what that means.
Money, like anything else, has a price. When you want to consume a hamburger, you pay the price of a hamburger.
If you want to consume money (i.e. borrow to buy a house or build a factory), you have to pay the price of money.
That price is the interest rate.
By setting interest rates at zero, the Fed is telling the world that money is free, i.e. that the US dollar is worth nothing.
(Negative interest rates imply the dollar is worth less than nothing.)
After my conversation with this young entrepreneur, that seems abundantly clear.
With no execution, her idea is fundamentally worthless. But she wants one million dollars for it.
So based on my math, if $1 million = her idea = worthless, then the value of a single US dollar is 1/1,000,000 of worthless.
Look, we’re in a period right now where US dollars are relatively ‘strong’... against oil, foreign currencies, etc.
People often think that when something is strong, whether a nation or a currency, that it will be strong forever.
This is a major fallacy.
It wasn’t even four years ago that the Japanese yen peaked at 76 per US dollar. Today it has weakened to 120.
In July 2008 the euro was worth almost $1.60. Now it’s $1.11.
It’s all part of a cycle. Currencies, like nations, rise, peak, and decline.
That’s absolutely going to happen to the dollar as well, especially when so much objective, everyday evidence suggests that it is excessively overvalued.
What this means is that if you are holding US dollars, you have a once-in-a-decade chance to trade something that is fundamentally worthless and objectively overvalued, for something that is real and undervalued.
In our case, we’ve loaded up on productive farmland here in Chile.
We’re also working on buying a profitable business in Australia at a time when the Aussie dollar has been punished.
Next week, I’m off to Colombia, where the peso has sunk below 3,000, to look at property.
If you have limited funds, there are shares of foreign companies (junior mining stocks, resources companies, macro ETFs in places like Indonesia and Colombia, etc.) that are trading for less than their net asset values AND pay solid dividends.
No one has a crystal ball, so it’s impossible to say precisely when it will turn. This part of the cycle could last weeks, months, or years.
Even if it does take years, though, it’s hard to imagine being worse off for buying a profitable business or shares of a well-managed company that pays a 6% dividend.
These are sensible investments no matter what.
But at some point down the road, the inescapable gravitational pull of fiscal reality will pull the dollar back down.
And just as the dollar’s strength has become way OVERvalued, the next part of the cycle will probably punish the dollar just as much.
Which makes this time, right now, a gift. Use it to build for the future, because it won’t last.
Have a nice weekend,
Simon Black Founder, SovereignMan.com
If you have limited funds, there are shares of foreign companies (junior mining stocks, resources companies, macro ETFs in places like Indonesia and Colombia, etc.) that are trading for less than their net asset values AND pay solid dividends.
No one has a crystal ball, so it’s impossible to say precisely when it will turn. This part of the cycle could last weeks, months, or years.
Even if it does take years, though, it’s hard to imagine being worse off for buying a profitable business or shares of a well-managed company that pays a 6% dividend.
These are sensible investments no matter what.
But at some point down the road, the inescapable gravitational pull of fiscal reality will pull the dollar back down.
And just as the dollar’s strength has become way OVERvalued, the next part of the cycle will probably punish the dollar just as much.
Which makes this time, right now, a gift. Use it to build for the future, because it won’t last.
Have a nice weekend,
Simon Black Founder, SovereignMan.com
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