Can You – Should You – Value Knowledge in Dollars and Cents?

Friday, September 28, 2018 Delray Beach, FL - I try to limit my wealth-building and business advice to what I know to be true from experience. That’s because I am skeptical of advice derived solely from thinking. When I first began to read business books, long after I’d retired the first time, I was surprised to find that many of the bestsellers were authored by academics who had no actual experience. Their arguments were sometimes convincing. But most often they were not. They contradicted the lessons I’d learned. As for books and speeches and essays about investing, some of them, like Warren Buffett’s advice, made great sense. And those were based on experience. The others, based on theory, were sometimes persuasive. But when I put the advice to work I was almost always disappointed. All that is to say that I want to discuss a theoretical issue today. If you have my bias towards experience-based knowledge, this may seem like bullshit to you. But I think it’s actually very important. So here it is… There is a popular argument today that says you can’t measure the value of an internet business by traditional metrics, i.e., revenues and/or units of production. Internet businesses, the argument goes, are mostly about knowledge, and the old metrics don’t put a price tag on knowledge. In other words, since knowledge is a primary asset of knowledge-based businesses, they don’t get the bottom-line credit they deserve when it comes to the balance sheet. A Key Difference I remember learning about productivity in ninth grade. The teacher made an effort to distinguish between productive work and the other kind. Productive work was building a house. Unproductive work was digging a hole and filling it up again. Knowledge is a valuable thing. In business it is a currency that can be traded for power. The specific product and marketing know-how a business acquires is one of the most important factors in its growth and its ability to outperform its competitors. Knowledge-based businesses are technical, and technical businesses rely heavily on knowledge. But that doesn’t mean the knowledge they have should be listed as an asset. The problem with valuing knowledge is one of measurement and obsolescence. I know, for example, that contacting sales prospects as soon as possible is a very important factor in most direct-selling situations. But how valuable is it in any given situation? I couldn’t say, because there are dozens of other equally important factors that come into play. It is impossible to measure the value of any one in isolation of the others. And it is impossible to run a tab on all factors, because (a) you can’t know all of them, and (b) their importance is always changing. Likewise, the value of knowledge is not permanent. A state-of-the-art database technique can become obsolete in 24 hours. It happens all the time. So What Counts? Useful knowledge sooner or later results in increased revenues or profits. (This is a tautology. I am establishing a premise: In business, useful is that which produces sales or profits, reduces costs, etc.) And so it seems to me that it is perfectly okay for the value of knowledge to go uncounted until its effect can be measured in dollars. The real issue here, for me, is the argument itself. Why would you want to want to put knowledge on the balance sheet? I can think of a few reasons, none of them good. We live in a very strange economic environment, where businesses are no longer valued for their productivity or profits. Everything is market share and potentiality. And the old tools of measurement have been discarded. At the end of every fiscal year, incentive-based executives busy themselves with projects that will produce better profit-and-loss statements. Some of this activity is very good – e.g., putting into place sales programs that have been postponed. But much of it is ultimately unproductive – e.g., bringing forward next year’s income. Looking good on paper (or in theory) is like having your face lifted. At a glance, you appear younger. But on closer scrutiny, you lose twice: You’re still old – and you’re vain to boot.