The Value Equation

Chapter 12Animal Spirits

Up to this point, I have painted a highly rational picture of the way businesses are valued and deliver shareholder EMVA. At the heart of this image lies the ability of businesses to reliably deliver current equity returns. But facts have a way of interfering with such an orderly worldview. I can hear you thinking about the heady valuations often accorded public companies possessing little or nothing in the way of operating profit margins, together with business models that have yet to be proven or defined.

In his seminal 1936 work, “The General Theory of Employment, Interest, and Money,” British economist John Maynard Keynes pointed out that the world does not work as neatly as mathematical expectations might suggest. Instead, spontaneous optimism and urges to action arising from “animal spirits” can cause actual market performance to deviate from what might be expected. Nearly a century later, the prevalent influence of social media could only serve to magnify animal spirit formation. Keynes's observations would place him at the forefront of the eventual study of behavioral economics.

John Maynard Keynes

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Public companies, of which there were fewer than 4,000 in the United States at the end of 2020, are often different with respect to the immediate linkage between corporate business ...