Rodent Regatta

Someone explain to me why there’s not a clear correlation between the tax rates of sixty nine countries shown in this KPMG report and the winners and losers in the offshoring trend. Note this quote:

”Although the survey captures an interesting snap shot of global tax rates, it must be remembered that a low tax rate does not necessarily signify a low tax burden. Consequently, one must consider a particular nations tax base to properly gauge the tax burdens.”

CBS News Sunday Morning put David Pogue on site at Google to tell the story of the company. Many things about the story entertained. It was reminiscent of the Silicon Valley of the late 1990’s. Tech companies in that era were hiring at will and creating great places to work. Fun, long hours, lottery-scale payoffs and popular culture were key elements of the work place.

CBS’s report mentioned some numbers that caught my attention. Google has sales of $1 billion primarily from advertising revenue. Google is expected to be valued at $20 billion when it goes public.

IBM is valued at around $158 billion. IBM has sales that exceed $89 billion a year. The company earns over $7 billion a year. The stock market puts a value on WalMart that exceeds $257 billion with $258 billion in sales and profit of almost $9 billion.

What makes Google worth twenty times sales? The answer lies in thought processes that are holdovers from the bubble.

Interviews and news reports have overworked the phrase ”jobless recovery” to describe the move out of a ”technical recession,” and into a period of economic improvement. Unfortunately, too much emphasis has again been placed on stock valuation as a metric for economic enthusiasm or disappointment. Remember, we’re the same group of people who created a bubble by thinking that stock prices were near term indicators of company performance. Only over a long period of time will a company’s stock price really reflect the underlying intrinsic value and growth in book value.

Yesterday, the Dow was down over 160 points. It may go down again today. Until we begin to depend on real information and not media spin, politicized economic analysis or the latest quarterly report, we’ll get more of the same.

A business has to perform. It has to generate more cash that it consumes. For anyone just getting started with investing or those attempting to evaluate politicians and their likely impacts on free enterprise, I suggest two key resources. First, go read all of Warren Buffett’s letters to shareholders. Yes, even the one written in 1977 is relevant. It’s outstanding business wisdom.

Second, no matter how complex a business or economic event may seem, there is a simpler analysis underpinning it. You’ll get to the bottom of it if you use the principles set forth in The Accounting Game: Basic Accounting Fresh From the Lemonade Stand. No investor or business owner should lose sight of the things this book teaches.

On this date in 2000, the NASDAQ closed at 5048.62. Berkshire Hathaway’s A shares stood at a 52-week low of $40,800 per share on that date.

As of this writing, Berkshire stands at $94,250 per A share and the NASDAQ is at 1984.51.

Remember when earnings, sales and a ”real” business were thought to be unnecessary? If you remember any of that, you lived through one of the great bubbles in American history. If you don’t remember any of that, you were either asleep or too young to be aware.

With 290 million people in this country and a world-wide population of 6 billion, where will your customers be in the future? Rather than go into some protectionist mode, it’s time to use the best techniques available in business to become the preferred supplier of some product or service. Or, you can be a frightened chipmunk.

There were several reading suggestions in Warren Buffett’s recent letter to shareholders:

1. Buffett’s own Dividend Voodoo is an op-ed piece that was published in the Washington Post on May 20, 2003 (subscription may be required)
2. His article for Fortune on October 26, 2003, regarding our trade deficit is a must read (subscription may be required)
3. Buffett bought Clayton Homes after reading Jim Clayton’s autobiography, First A Dream
4. Bull! by Maggie Mahar
5. The Smartest Guys In the Room by Bethany McLean & Peter Elkind
6. In An Uncertain World by Robert Rubin
7. Jason Zweig’s revision of The Intelligent Investor was also mentioned