What's the value?

At dinner with Owais, he spoke about his experiences doing research on Indian infrastructure projects. Part way through he relayed a question, he had received, that was really intriguing to me: "How do you think about the value of a company?" My first inclination was to think that the value of a company today is based on its future potential to generate cash. And with the crazy ways accountants can document the money a company is earning, practically there's a lot of ways to measure that value. The main ways I would want to start:

1. If the company is going out of business, figure out what $$ could be realized if the company was sold for its parts (either the hard assets, or sold as businesses)
2. If the company is a going concern, then I'd be interested in the free cash flow and the earnings that could be generated in the next 3-5 years, and then discount those values back to today.

In their own ways, each helps assign a value to the company. But that's not what I think the price would be. Like grocery shopping, buying name brands come with a price premium. Some level of premium may be worth it because the premium brand has premium ingredients, does a good job at producing the product, and there are more people interested in the brand. Similar to name-brand stocks, there are more people watching the stock, which should mean less volatility in the stock. A non-brand stock can suffer more if there are changes in an industry or if something out of the ordinary occurs. But, much like grocery shopping, there's a measurable balance that can be realized when shopping for value. I'm will to pay a little more than the calculated value would be suggest. But beyond that "little more," I'm perfectly happy to purchase a non-name brand if it serves the same purpose.
----------------------------------------
I flew back to California for Arti's bridal shower. I bothered with a 36-hour stint in LA because listening to a Grameen co-worker talk about a fallout with her from a wedding, I realized that Arti has been an amazing friend to me. I recalled one time when we walked around Huntington Beach and we were wondering out loud where was Mr. Right. She has a beautiful heart, and deserved in that moment the man of her dreams. I knew her Mr. Right would be the lucky one. Now, as an engaged woman, I have seen her blossom like the beautiful flower that she has always been. As I sat with her and other friends like Tripti T., Pinki G., and Manka G., my heart overflowed with happiness with being present at a special moment like that. Those types of moments are impossible to put a price on -- they are valuable though not priceless as VISA would like to lead us to believe. There is a practical limit to the amount I could afford for a plane ticket. But that practical limit is based more on a gut emotion than a financial checkpoint -- 400 ok, 1600 not ok -- but impossible to tell where that yes/no line gets crossed.

What's important to me, is that despite being a woman who throughout her life has been to content to spend time alone -- I honestly felt at the moment of seeing Arti blush at her bridal shower, it felt like there was no amount of money that could have replaced that moment of happiness. It's the relationships with friends, sharing in one another's memories, laughing & playing games, eating a meal together, etc., that make life worth living!

------

So, when I tie this back to the price that could be paid for the stock of a company, I also recognize that there is an element of the price that reflects the untangible human talent of the employees and the management. The human effort involved with producing a product and a service. Thus, when I think about the value of the company, I start with a financial measure, add/subtract a premium based on the brand, add/subtract based on the human capital, and then measure against my "gut." That is part of the art that comes from experience in developing valuation. And it's why I enjoy learning from others how they have come to define value in their lives, and learn how they have missed the boat with missing something that turned out to be valuable.

Post Script -- "Hood Cinema Presents"

My surprise home coming almost turned into a pie in the face for me. I knew that Chris should be home on Friday because Saturday was going to be a Hood Cinema Presents evening at our house. (For those who don't know, I've purchased a house in Compton and we have running jokes about living in a secured compound in the middle of the 'hood). Anyway, I had Supershuttle drop me off at home. Unbeknownst to me, I didn't have my house keys. Oh, and I had forgotten my cell phone in DC. Oops and oops.

I called Chris from the gate. First call, "Chris can you let me in." Response: Hangs up. Second call... rings, rings... silence. 'Hello, can you hear me?' Response: Hangs up. Shit, I think to myself. Moments later a car drives up and I walk through the gate behind the car. I walk up to my front door. I ring the doorbell. (pause) I ring the doorbell in an irritating fashion. The light comes on from the staircase. There's hope, I think! Chris opens the door and is genuinely surprised to see me. Yay! It worked.

Now, for those that know Chris, you know that doesn't mean that there was a smile, or any jumping up and down. He stated very dryly "what are you doing here?" and then followed me up to the living room where we watched dirty jobs. The fact that he was watching a rerun was the big sign that (1) he was surprised and (2) he was happy to see me.

When I asked him why he didn't open the gate, he said, "We live in Compton. I didn't know who the hell was at the gate. And I wasn't going to let just some random person in." As you can imagine, on my return to DC, I made sure that I brought my house keys with me this time.

So, thanks to everyone (Kisha, Iliana, Chris, Jacky, T Foxe, Denise, Jerry, et. al) for letting me crash the Hood Cinema Presents event!