Paper Wealth

Pfäffikon SZ, Switzerland – More and more investors become irritated when overvaluation and paper wealth are highlighted. It is amusing to see how investors react in a human way when the phenomenon ‘paper wealth’ is broached; paper wealth disappears like snow in the sun. Hardly anyone pulls this paper wealth to themselves because it is like musical chairs among investors.

Market Capitalization
Market capitalization is an uncomplicated calculation of the number of outstanding shares times the current stock price. Market capitalization behaves like elastic and often has nothing to do with the actual valuation of a company. Market capitalization is also separated from the value of the cash flow of a company. Nevertheless, the purchase of a share or a company simply means that an investor expects that the cash flow of the undertaking will improve in the future; precisely at this point, there is the rub.

Cash Flow
Historically, equities are expensive and when based on cash flows even priceless. No investor is worried about it, as government Trump apparently will create a (fiscal) economic miracle. However, based on historical data, the expectations surrounding the current extreme price levels in the S&P 500 are somewhat lacking for the long term (10 years plus). If we also take into consideration the current market cycle, the chance of completing this cycle is high. The result is that paper wealth of (passive) equity portfolios, in particular, will disappear the coming years.

The claim that current shareholders have in general on the future cash flow is no longer tenable. For the record; the free cash flow is something else than the operating result. The cash flow has historically been a more reliable parameter than the operating result. This is a remarkable fact because investors are only interested in (whether or not polished) results. Passive investors, especially in popular ETF products, are recommended to hold to the light again their risk tolerance. Paper wealth is coming to a dead end.

It remains for me to wish you a good weekend.


Jan Dwarshuis is CIO at Thirteen Asset Management AG. Dwarshuis writes his columns in a personal capacity. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in above mentioned shares and has no intention of doing so in the next 72 hours.