Tuesday, April 17, 2012

Proofs. Or hyberbole?

For Enterprise, the path to the money lies through the laying down of proofs that will attract Investment.  There are different grades of proof, beginning with the Emotional or Intuitive belief that drives Enterprise to create new value in the first place, and moving through logical analysis of emotional expectations, scientific validation of logical conclusions, engineering designs to implement the science and the logic, commercial commitments to a project, and ending with a history of financial performance, in the field, over time.

Each level of proof takes time and costs money to develop, which is the great conundrum for both Enterprise and Investment.  Enterprise needs Investment to prove its value creation thesis. Investment needs Enterprise to prove its worth.  It's a classic problem of trust and confidence that is the job of professional financiers to resolve.

Wall Street offers an interesting solution.  It promotes the buying and selling of shares in public companies that are already successful.  This gives Investment the opportunity to participate in Enterprise that doesn't really need the money. Historical proof of value, which takes time to build and skill to analyze, gets replaced by future projections of past results.  And these projections are never of sustained profitability.  They are always of growth (or decline) in share price.

Emotion takes over from reasoned analysis, and Enterprise is driven to play to that emotion.

In a system that is supposed to be built on Proof, what we end up with is hyperbole.

Liquidity becomes important, because Investors have to believe they can sell out when they want to get out, either to reap their profits (if they guessed right) or cut their losses (when they guess wrong).

Liquidity gives us volatility and instability, not the predictability of reliable proofs.

For the economy in general, we get booms that always, eventually, go bust!

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