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NUMBER CRUNCHING
By John Newsome on 15th March 2012


Sometimes it's difficult to put exact numbers to things you know are vital. Warren Buffett, the billionaire investor, tells us "valuing a business is part art, part science". He means that the art part of the equation is a bit woolly because it relates to matters such as quality of management or brand value, which are devilishly difficult to weigh. You know they are vitally important but the chances of pinning concrete numbers to them rivals that of winning the lottery - without buying a ticket. Albert Einstein, who wasn't an investor but knew a thing or two about numbers, echoed similar sentiments with his quote that "not everything that counts can be counted and not everything that can be counted, counts". Wise words indeed; a genius couldn't improve on that.


For example, let's look at the value of Sterling which has weakened considerably over recent years. Now, there is no such thing as the 'right' value for a currency, just like there isn't for a house, a car or a bar of chocolate; it all depends on what each individual is prepared to pay. In one respect, Sterling is emulating the Swiss Franc; it yields next to nothing. Regrettably, though, it's not for the same reason.


The Franc is and always has been, a low yielding currency because Switzerland conducts its financial affairs in a prudent fashion. The UK, on the other hand, hasn't done so for quite some time. Government debt of £1 trillion represents a toxic legacy and illustrates just how difficult it is going to be to get this country's finances back in sensible shape. Can it be done within reasonable time? We don't know but when the annual interest bill alone matches the defence budget, you don't need to be Einstein to appreciate there's a problem.


Base rate of ½% represents the lowest it has ever been in the entire history of the Bank of England, which might suggest current circumstances are extreme. When the cost of money rises, as it inevitably must, we will get a clearer idea of the headwinds that lie ahead. There are already well in excess of 300,000 mortgage accounts in arrears despite mortgage rates being as cheap as they have ever been. How many will struggle when rates move higher? We don't know that either but we can hazard a guess that it's going to get worse.


So, just because accurate information might be difficult to gather, it shouldn't prevent us from reaching conclusions. As the famous economist John Maynard Keynes said "I'd rather be vaguely right than precisely wrong". It's not dissimilar to when my eldest son extols the virtues of Kanye West, 50 Cent and rap music in general. I can't prove it's rubbish but what I know and he doesn't, is that rap is spelt with a silent 'c'.

 

John Newsome can be contacted on:
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