Several years ago, I gave myself the title of Valueologist. I thought that if no one will give me a fancy title then I will make one up for myself. My good friend Sean has for a long time called himself a Gapologist. I was feeling left out.
Gapology is the study of the gap. The space in between. In markets that are dominated by a few big companies there is always space around the sides and Gapology is the study of this space. It is the space of the entrepreneur. The space of opportunity and flexibility.
My skill is in the financial metrics that define business performance and value creation. While Sean has an eye for spotting the opportunity through the application of gapology, I can apply valueology to quantifying the value of the opportunity. Together we have exploited the value of many gaps. We have also had a few gaps close in on us and squeeze us out with a few bruises. Such is the life of the entrepreneur.
When asked about the value of something it is an exceedingly difficult question to answer. Value is different for everyone. You will be familiar with the saying, “beauty is in the eye of the beholder”. The same can be said for value.
A traditional methodology to value a company is the forecast the future free cash flows and then discount these at an appropriate cost of capital. The calculation produces a present value for the future cashflows adjusted for time and risk. To do these calculations we need to make all sorts of assumptions about the future, all of which will likely be wrong to some degree. This is what I call the art of reducing the wrongness. Valueology certainly is not an exact science.
When valuing a company, we are trying to determine the price we should pay for the future cash flows. If the company is listed, then we can look up the price on the stock market and compare it to our valuation. If my valuation closely matches the share price, I can feel my ego shining. My model works, I am a rock star. All the time I know that my valuation could be wrong, and the market could be wrong.
Repetition goes a long way to overcoming this problem. This is where a valueologist earns their stripes. Having done these enough times a valueologist should be able to close the gap between the price and the value with a hypothesis that explains the difference. This is gapology of another kind.
The market can be wrong for a long time about the value of a company. This is especially true when complex structures are used to hold shares in businesses with complex business models. Add to this some ambiguity about the business environment and government policy and you have a concoction suitable for a witch’s broth. Just add lizard tails for good measure.
I suspect that Naspers has a good dose of this witch’s broth flowing is the water coolers of their head office down on the foreshore in Cape Town.