Debts and Freedom Demand and Prices in Speculative Markets and Economics

Deflation and Asset Values

In a deflationary environment assets tend to decline in value. Buying a dollar at 50 cents may not be a bargain if the asset value is dropping. Historically, investors have found attractive opportunities in companies with substantial hidden assets, such as an overfunded pension fund, real estate carried on the balance sheet below market value, or a profitable finance subsidiary that could be sold at a significant gain. Amidst a broad-based decline in business and asset values, however, some hidden assets become less valuable and in some casese may become hidden liabilities. A decline in the stock market will reduce the value of pension fund assets; previously overfunded plans may become underfunded. Real estate carried on companies' balance sheets at historical cost may no longer be undervalued. Overlooked subsidiaries that were once hidden jewels may lose their lustre. The possibility of sustained decreases in business value is a dagger at the heart of value investing (and is not a barrel of laughs for the other investment approaches either).