The Wisdom Of Finance: Discovering Humanity in the World of Risk and Return

by Mihir Desai

Finance, ultimately, is a set of tools for understanding how to address a risky, uncertain world.

The finance recipe for value creation can also easily be mapped to the way we think about our lives. The first step, “surpass the expected returns of your capital providers,” can be understood as saying that you should give more than you take; that is, return much more to the world than the considerable talents you’ve been given. The second step, “surpass those expectations for as long as you can,” is simply another way of saying never stop giving more than you take. Finally, “grow, so you can keep generating returns that are higher than your cost of capital” is just another way of saying that you should never stop investing in yourself and continue to grow.

For people in finance, accounting’s approach to value is deeply troubling. Representations on balance sheets deliberately leave out a company’s most valuable assets because of the idea of “conservatism”: accountants give zero value to assets that they can’t value precisely. In fact, the most valuable assets of companies like Coca-Cola, Apple, and Facebook (their brands, intellectual property, and user community) never show up on balance sheets. It gets worse. Because of the principle of historic cost accounting—that assets should be represented at their acquisition price—some assets are listed at values that are completely distinct from current values.