John Kay

Diversified financial conglomerates are a bad idea. Shareholders become victims of the organisational tensions that follow, customers suffer the resulting conflicts of interest, and taxpayers see government guarantees used as collateral for speculative trading.

Diversification is a matter of judgment not statistics. A model will tell you only what you have already told the model and can never replace, though it can enhance, an understanding of market psychology and the factors that make for successful business.

Asset prices are a measure less of our wealth than of our propensity for self-congratulation. The net effect is only a transfer between the existing owners and the prospective owners.

For fundamentalists, the value of an asset is the sum of the returns it will yield over its life. For fellow travellers, an asset is worth what someone else is willing to pay for it.

There is no recipe for enduring excellence: the distinctive characteristics that yield competitive advantage, because they are hard to replicate or emulate, will inevitably be more appropriate for some conditions than for others.

Models are only as good as the correspondence between the model and the world, and this is where problems begin.

In financial markets, the more complex the instrument, and the more uncertain the outlook, the greater the likely range of views of common value. More often, trading puts assets in the hands of those who think the assets are more valuable than they really are.

An average long run value of the equity premium of up to 8% is arithmetically unsustainable: within a few decades, profits and dividends would absorb the whole of national income.

Four years from now, the space agency plots to send a rocket to the moon to find out whether its made of blue cheese. Today, near the fourth anniversary of Germany’s 3G mobile license auction, John reminds us of a fairy tale that shows how vanity and greed can promote large-scale self-delusion.

Can Google, founded less than a decade ago, really be worth $35 billion? A short guide to the basic economics of asset and business valuation leads to a clear answer.