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No matter how much is written or talked about the so-called “Science of Investments”. Thousands of people who pretend to be economists or Nobel Prize candidates talk and talk a lot of nonsense about the theorems of unknown people and prisoners' dilemmas and commonplaces that only serve to keep students inside the class and from running away, terrified to hear so many imbecilities.
The only certainty is that a business, a company or any type of investment has some value purely and exclusively due to its ability to generate cash.
If the company does not generate cash, or the market deduces that it cannot do so in a reasonable period, the company has absolutely no value, regardless of its machinery, its facilities, its management talent, its relationships with the government, or with groups of power. Simply put, if it does not generate cash, the company is worthless.
If a company has a licensing contract with an important brand, and for some reason it loses that license, and the market deduces that by losing it it will not be able to generate cash due to its level of debt or for some other reason, then the company will see how its assets are auctioned off for a few dollars, even though their book value is much higher. I apologize, but I did not invent capitalism.
I say this because following my last article on Real Estate vs Bitcoin in terms of store of value, I received some comments that seem not to take the above into account.
Real Estate is an indisputable store of value, but it is not a cash-generating business for the owner of a property. It may be a cash generator for the builder or developer, but the individual who buys real estate, and expects to be remunerated attractively for the rental value, is making a big mistake because Real Estate is not a cash generator. This is due to the large amount of related expenses that a property has.
If you consider this and compare it with other store of value options such as gold or Bitcoin, the latter has no rival.
The rational thing to do when making an investment is to take into account the possibility of cash generation from that investment and its availability as immediate as possible. In this sense, Real Estate plays last.
The crypto ecosystem created a sub-ecosystem totally intended to make immediate cash, generically called DeFi. Everything that happens on all DeFi platforms is designed so that some people immediately take other people's money. This is not an investment, it is simple swallow speculation. Capital has very well distributed detectors to sniff out blood, and as soon as it does, it goes there without scruple to invent the most creative engineering. But let's not call this investment because it is not, it is simply financial capitalism.
Bitcoin, on the other hand, is a very long-term store of value.
This is how the valuation process of a company or business is carried out. The cash flow is calculated according to the business model (income minus expenses) and is projected into the future with various assumptions, say, for example, 10 years. The cash flow is then discounted with a discount rate, and a terminal value is calculated with assumptions accepted by the parties involved in the valuation. The sum of the discounted flow and the terminal value gives us the value of the company or business. But of course, value is one thing and price is another. Then the negotiation begins and a purchase-sale price is reached or not.
This cannot be done very clearly with Real Estate. You can estimate all you want, but it is difficult to reach a conclusion like “you should invest in this property because it has a very good cash flow.” It is true that it is most likely that the value of a property will be maintained over time and even increase, which makes it very attractive for store of value status. But it can hardly be considered that, in addition to store of value, it is a better investment than another investment that promises an attractive cash flow, such as Bitcoin.
Not even gold can compete with Bitcoin, because it has many disadvantages compared to a digital asset. You can't keep a million dollars in gold at home, but you can keep a million dollars in Bitcoin at home and retrieve it with a Smartphone and an Internet connection. One cannot take a million dollars in gold on a trip. But you can take a million dollars in Bitcoin to the most remote island you can think of. There are not many places where you can buy and/or sell gold. But one can buy/sell Bitcoin from the bathroom of his/her house. No less important is the fact of converting gold into cash, if needed. The process can be long, in any case, much longer than the 3 clicks needed to convert Bitcoin into cash.
As for Real Estate, one cannot take the value of one's property on a trip. You can use it as collateral to take out a loan, as is usually done in DeFi with digital assets, but by entering the realm of debt, we are already increasing expenses uselessly, which is not necessary with Bitcoin stored as a store of value, to be used when it is really necessary, without having to resort to financial tricks in which the bank always wins.
They talk to me about the income that real estate can generate. But that cannot be taken as cash generation, because the property rental business model is very weak, since the expenses are fabulous and often unforeseen, and, worst of all, the more properties you own, the more bigger expenses exist, especially unforeseen ones. Taking into account the taxes paid to the government and the municipality, the cost of utilities, the very high maintenance costs, amortizations and depreciations, the implicit risk of late payment of rent, or late payment from the bank documents given as guarantees, the permanent risk of theft and vandalism or floods, hurricanes and other natural disasters, we see that we are in the presence of an unattractive business model, if what is sought is to generate cash.
What other traditional assets can be considered stores of value, which in turn promise attractive cash flow for valuation?
There are many. For example, a businessman/woman who works with steel can purchase steel in large quantities to ensure the supply of this input for an extended period of time, if his/her business is perceived as attractive in the long term by the market.
Any commodity could serve as a store of value if its perishable condition is taken into account when valuing it.
But we are in the same situation in which Bitcoin cannot be beaten. If cash was needed, how long would it take the steelmaker to obtain cash? How long would it take the agricultural producer to obtain cash from the sale of a part of his soybean production?
Conclusion
My teacher Tom Copeland autographed his book “Valuation” for me with a simple phrase: “Remember Jerry, Cash is King”
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