Are We in a Bubble?

"There is simply no way of knowing anymore. In the past, most valuations were tied to tangible assets - machines, property, inventory. The book value of such assets represented around 85% of all S&P 500 valuations as late as 1975. When value is tied to physical assets, it is easy to notice when stock prices stray too far from the assets they represent."

"Today, the book value of tangible assets represents less than 10% of S&P 500 valuations. This means that most value is tied to intangible things like code, content, relationships, and, indeed, pure hype. Such assets don't have a clear book value or replacement value. They may have cost $5 to produce or $5 million, but that tells us very little about their worth."

"In contrast, when Ford had $200 billion in unsold cars on its balance sheet, it was pretty easy to figure out the value of those cars. Even if they didn't sell well, you could still discount them 20% and liquidate the inventory, or scrap them for parts. And even if they sold extremely well, they would never be worth 10X more than their book value, let alone 1000X or a millio"

Market valuations have shifted from tangible, book-valued assets to largely intangible assets, making price-to-asset relationships opaque. In 1975, tangible assets comprised about 85% of S&P 500 book value; today they account for under 10%. Intangible value rests in code, content, relationships, and hype, which lack clear book or replacement values and whose production cost provides little information about worth. As a result, conventional liquidation or discount rules no longer constrain valuations. Large technology assets such as operating system source code, massive user bases, or advanced chip designs have uncertain true worth until market corrections reveal realized value.

Read at Old/New by Dror Poleg