Patrick Jahnke is right: this is a fundamental flaw at the heart of modern accounting. I have said this morning that nothing lasts forever, and I stand by that. It’s wise to realise that’s true. But to assume nothing has value in a generation’s time is as flawed as thinking anything lasts in perpetuity. And what the practice of discounting in accountancy means is that no company plans for a generation hence. And yet it is believed that investing in the shares of these companies is a rational basis for making pensions provision.
That this is not true – because these companies have no plan for the time when pensioners will want to realise their investments – should be apparent. But it is not.
Which human organisation has a longer time horizon than the major corporation?
No, not in theory, in practice?
Bonus question. If we have an inevitable too short a time horizon among the things we can invest in then aren’t we going to have to have a secondary market in investments?
“Which human organisation has a longer time horizon than the major corporation?”
The Church?
Universities? Trinity College Cambridge owns the 999 year lease on the Millennium Dome. They’ve been around for almost half that long.
I don’t know about organizations, but it appears to be a dead cert that Brexit will outlast several generations of wogs.
Patrick Jahnke is right…
Actually, Jahnke’s assertion that corporations don’t engage in (or value) long-term planning is demonstrably false… and obviously so. Were Richard Murphy anything other than an incompetent fool he’d know that.
“I have said this morning that nothing lasts forever, and I stand by that.”
He even manages to make a truism sound pompous.
If only there were such things as pension fund managers who could review such matters and act accordingly, but hey I guess I’m just some kind of dreamer?
An outfit that claims to be the oldest business in Britain was founded in 1136.
You could date the Roman Catholic Church from its great flounce-out of 1054. There are certainly Oxford and Cambridge colleges from the thirteenth century, and Scottish universities from the fifteenth. Some schools are old – WKPD lists half a dozen claims for the tenth century.
Perhaps some ancient institutions were suppressed when the NHS was formed. Does anyone here know?
“Which human organisation has a longer time horizon than the major corporation?” Some family businesses would be another answer.
“Rabbinic Judaism, also called Rabbinism, has been the mainstream form of Judaism since the 6th century CE, after the codification of the Babylonian Talmud.” Wikipedia
But would that count as an “organisation”?
Didn’t Sun Life Assurance start life in the 17thc?
I have said this morning that nothing lasts forever, and I stand by that
What a mind. Though his posts sometimes seem like it.
And what the practice of discounting in accountancy means is that no company plans for a generation hence. And yet it is believed that investing in the shares of these companies is a rational basis for making pensions provision.
If you were locked into the investments you make when you start a pension he’d have a point, but you aren’t so he doesn’t. Can he grasp the fact that pension funds can change the companies they invest in?
So we shouldn’t invest in private companies because their continued existence can’t be predicted some 50 years into the future.
New businesses should finance themselves how?
Meanwhile, I assume the existence of the National Debt suggests the State’s ROI isn’t blowing anyone’s skirt up. I mean, I’m not an accountant or anything, but…
So we’re to do what? It’s going to be something tiresome, isn’t it?
FYI
EU Election poll: Lab 24%, Con 16%, Brexit 15%, UKIP 14%
https://www.youtube.com/watch?v=WXz4G2GuccA @1m 17s
The company I work for was founded in 1911 (changed its name to the current name in 1924), but has pre-cursor companies dating back to the 1880’s. It is a tech company. Amongst other things it sells software, some of which dates back to the 1970’s. One of those ancient products, which is supported by 20 people on the floor below mine, generates $1 billion a year in revenues.
Probably the most depressing aspect of this is that Patrick Jahnke is a Ph.D. candidate who works in equity fund management.
I expect stupidities from the likes of Richard Murphy, not from people who actually are responsible for investing other peoples’ money wisely.
The real problem is how do you assess the value of anything after 5 years, let alone 25 years?
Examples are all around us. But this is another case where crunching numbers has little value, like cost-benefit analysis. The Victoria line added value by cutting journey times and increasing connection points plus adding capacity. The numbers are invented justifications. The numbers for HS2 or that high speed train in California will never happen because they lack any other rationale. Putting a precise but inaccurate figure on future returns is not something that accountants should be doing
An experiment – how many companies in the FTSE 100 could you find that we’re older than, for example, the French Fifth Republic, or the European Union?
Rob “An experiment – how many companies in the FTSE 100 could you find that we’re older than, for example, the French Fifth Republic, or the European Union?”
Older than the EU? Quite a few, particularly if you consider the precursors of companies that have merged or acquired older companies. Starting with the A&B’s, Aviva can trace its history back to the 17th Century, ABF is part of a group that owns Fortnum & Mason (1707), Barclays goes back to the 1690’s, BHP goes back to 1865, and those are just the ones off the top of my head.
Antofagasta – founded in Bolivia in the 19th C.
BAE: precursor companies go back to the beginning of the 20th C (Marconi is probably the earliest).
BP – early 20th C
Ashtead – 1940s
Bunzl: roots go back to (Austria?) mid 19th C
BAT: 1900’s, precursor companies 19th C
Burberry: 1856
British Land: also 1856
I could go on
Tottenham Hotspur is the latest Football Club to plan beyond a generation hence. Airlines do it routinely.
I was involved in a new business start-up in (blimey) 1989, owned by Company A.
Company A sold (the start-up) to B which sold to C which was bought by D which was bought by E.
A is vastly bigger now, which is good because I still have a pension due from them.
I have shares in E the rights to which originated wiith the start-up. The customers are 100% different, as the business has changed. It no longer operates in its origin country.
None of this was anticipated in 1989, however it’s assumed that a business will adapt and change over the years. Isn’t it?
My great great great great grand pa’s business started in 1802, reorganized in 1902; continues, not necessarily in the same products .
Didn’t Sun Life Assurance start life in the 17thc?
Sun Life (the UK, not the Canadian one) started in 1810 as an offshoot of Sun Fire Office (no longer extant) founded 1708. Equitable Life (the world’s first commercial life insurer) started in 1762 – whatever happened to them? john77 and I worked for a life office that celebrated its 150th anniversary in 1994, but it was bought by the frogs who borked it.
Firm I work for dates from 1803, was in it’s original owning family until 10 years ago. Still use some of the kit it acquired over 100 years ago, still have some tooling kicking around for making munitions from the period when the works was requisitioned in WW2…
@Diogenes April 16, 2019 at 9:17 pm
The Victoria line added value by by not requiring drivers; this was negated by politicians caving in to union strike threats and employing a passenger to sit in cab.
FTFY
How They Dug the Victoria Line
https://www.youtube.com/watch?v=GwRRSJ_wtIg @27m 26s
JackC “Airlines do it routinely.”
Some but not all airlines buy new planes that are depreciated over 25 years or more, but they would sell a plane or cut a route that didn’t fit their short term goals. Airport operators on the other hand depreciate their assets over 100 years.
Alex,
True regarding airlines, however even if they keep a plane for much less time than originally intended, disposal options are known from the start, and it’s known that the plane will have value for x number of years.
Our foremost potato-based Public Intellectual seems to be suggesting that we shouldn’t be investing in companies that don’t know exactly what they’ll be doing in 25 year’s time.
He must be right, because He says so. I just can’t work out why.