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The Journal of Wealth Management

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The World Has Changed: Investing in the New Economy

Jeffrey B. Madden
The Journal of Wealth Management Fall 2019, 22 (2) 87-98; DOI: https://doi.org/10.3905/jwm.2019.1.076
Jeffrey B. Madden
is a senior vice president and portfolio manager at RMB Capital in Chicago, IL
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Abstract

Today’s higher proportion of investments in intangible assets versus tangible assets is emblematic of a structural change in value creation. Investors have experienced that the digital network effects and other changes of the “New Economy” provide a different path for big winners, unlike that of the “Old Economy.” Moreover, the deterioration in the usefulness of generally accepted accounting principles (GAAP) accounting in general, and price/earnings ratio (P/E) in particular, pose a significant problem for investors. However, there is a sizable opportunity to be found by focusing on what has not changed. That is, the long-term life-cycle performance of firms is driven by the interplay of managerial skill (especially for nurturing a firm’s knowledge-building proficiency) and competition. This life-cycle framework is a uniquely useful guide for investors to navigate the New Economy. A key ingredient is a firm’s economic returns adjusted for GAAP deficiencies, for example, capitalization of research & development expenditures. This article provides an example of how life-cycle thinking leads to practical investment insights along with a case study of IDEXX Laboratories. This example represents the type of analysis needed to generate alpha via a portfolio of firms with skills attuned to the New Economy.

TOPICS: Security analysis and valuation, portfolio construction, performance measurement

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The Journal of Wealth Management: 22 (2)
The Journal of Wealth Management
Vol. 22, Issue 2
Fall 2019
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The World Has Changed: Investing in the New Economy
Jeffrey B. Madden
The Journal of Wealth Management Jul 2019, 22 (2) 87-98; DOI: 10.3905/jwm.2019.1.076

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The World Has Changed: Investing in the New Economy
Jeffrey B. Madden
The Journal of Wealth Management Jul 2019, 22 (2) 87-98; DOI: 10.3905/jwm.2019.1.076
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  • Article
    • Abstract
    • THE NEW ECONOMY
    • COMMON SENSE AND EMPIRICAL EVIDENCE
    • GAAP ACCOUNTING NOT ATTUNED TO THE NEW ECONOMY
    • MICROSOFT’S HISTORY SHOWS WINNING AND LOSING IN THE NEW ECONOMY
    • CONVENTIONAL SECURITY ANALYSIS IS OBSOLETE
    • THE FIRM’S COMPETITIVE LIFE-CYCLE FRAMEWORK
    • VALUE CREATION AT IDEXX LABORATORIES
    • ACHIEVING ALPHA IN THE NEW ECONOMY
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
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