Customer Reviews

Wealth Creation: A Systems Mindset for Building and Investing in Businesses for the Long Term (Wiley Finance)

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For educated people who want to know the big picture so they can make better investment decisions. Or, for those who own businesses and want to grow them so as to create more wealth. This book helps you make the right business growth decisions. If you aren't a financial expert, you will find yourself saying, "Aha, I get it much better now." If you are an expert, especially specialists, you will enrich your abilities through a broader understanding. This is the book for investors who want to know such things as what are the causes of changes in stock prices, how important is the skill of a business's management, what about competition, is it better to invest in a new or old, solid business? Not only is the big picture and its conceptual components presented in an understandable way, but actual examples of important companies and their results in creating or destroying the company's wealth are shown and explained in graphs. All in one short, concise book, written by a real world, financial economist who is lauded by two Nobel Laureates in Economics, business leaders, and academicians.

As an investor, "Wealth Creation" provides a detailed outline on what to look (and not look) for in a business. The detailed, real life examples - coupled with easy to read charts - makes the book easy to understand and allows the reader to quickly take away useful information and investment insights.

The book also provides a solid road map for the casual investor to help them find great, well managed companies that will provide great returns in the long run.

I strongly recommend this book for any investor looking to tie wealth creation with stock picking and investing.

Bart Madden has written a book that steps back from the details of financial analysis to look at the big picture of how wealth is created, wealth for everyone in the society. Here is a man whose claim to fame is developing insights and creating tools to better understand and analyze financial data, who pulls from a lifetime of experience to explain what lies behind these data. He steps away from balance sheets and stock reports to show us how systems thinking, the life-cycle perspective, and lean organization are critical to the effective working of our free market system.

Madden builds his perspective on some foundational principles that are not generally thought of when people consider corporate performance and capital markets: The notions that
WEALTH CREATION == VALUE TO CONSUMERS
and
CAPITAL == EMBODIED KNOWLEDGE
are not points of view that one finds articulated in the pages of the Wall St. Journal, Forbes, or even The Economist. They are, however, well documented in the data on economic performance and valuation presented in the book and in the long view that Madden advocates, in opposition to the short-term passions and immediate problems that color most people's identification of what's important.

As Madden clearly states (p. 21), the basis for the appeal of these ideas is that they aim at recreating, through the reforms in corporate governance and public policy that he advocates, a system whose benefits "are delivered to all members of [the] society," not for the narrow privilege of a few. This is not a paean to capitalism as we know it, but a frank acknowledgement of the problems of a system that has been corrupted by those in positions of power and influence and a call to enact reforms that will restore the value-creating mechanisms that true free-market capitalism so effectively employs.

In addition to his forceful and insightful presentation of basic principles and their implications, Madden also offers very practical suggestions for regulatory reform (p. 27) that build off of the system's strengths:
* Adjusting capital requirements for banks to require more backing for new and more complex products;
* Structuring executive compensation to encourage a more long-term view and linking it to capital requirements; and
* Crafting legislation that enables regulators to "adjust the dials" as they learn and the system evolves (in contrast to the fighting of last year's battles that is the normal response of both politicians and generals).

The other important constructive contribution of Madden's book is through his suggestions for reforming corporate governance, encapsulated in his reimagination of the board as "a facilitator of wealth creation." (Ch. 7) Specifically, he proposes that Boards undertake a regular "Shareholder Value Review" [SVR] that would
* Show clearly the firm's track record of wealth creation or dissipation;
* Evaluate management's resource allocation decisions from a value perspective;
* Quantify the long-term performance expectations for the firm and its competitors implied by current market values;
* Evaluate acquisition proposals from the shareholders' perspective;
* Ensure that top management compensation is tied to long-term wealth creation;
* Benchmark the plausibility of management's forecasts of future performance by assessing their skill level against other firms that have achieved similar results.

My one quibble with his proposal is that it is still heavily weighted toward financial metrics. Early in Chapter 7, he stresses the importance of non-financial information. Just as Madden has been at the forefront of the recognition that earnings don't drive value, he also recognizes that factors like commitment, integrity, and knowledge determine the ability of firms to generate the cash flow and growth that do drive value.

Despite this acknowledgement of the importance of non-financial factors, they only appear in the SVR as an after-thought, through a brief note that the review should include "also a description of how the firm's organizational structure can nurture a viable, performance-oriented culture."

All in all, this is a book that will engage senior corporate managers, money managers, political leaders, and students of our economic system with a wide range of ideas that link together to give a persuasive picture not only of the virtues of the free market system but also the steps that leaders in business, government, and finance need to take to realize those virtues.

Madden combines several concepts like systems theory, lean production, Deming's Plan-Do-Check-Act learning cycle, key performance variables (metrics) and a valuation model with greater emphasis on the cost of capital (including human capital) into a "competitive life-cycle" view of the firm.

Companies that adopt Madden's methodology should be better able to overcome Schumpeter's model of high innovation followed by competitive fade, maturity and eventual failure. Shareowners are more likely able to key in on valuation issues using a longer-term perspective and are likely to be less startled with earnings surprises using Madden's framework.

Madden argues against "fair value" accounting, arguing that a measure of economic return should express what was received, against what was given up. That can't be properly measured if the original cost outlays are unavailable but supplementary information on estimated market value would be a plus.

Although he recognizes the need to account for intangibles (especially around human capital), he provides little guidance in this area other than recommending that whatever definitions are utilized should be tagged using XBRL to enable fine-grained analysis. However, one slim volume can't be faulted for not providing detailed guidance to every step in a recipe.

The book includes a helpful chapter on corporate governance where he calls most management arguments against greater shareowner involvement like their supposed short-termism "a smoke screen because the plain fact is that CEOs want to either hand-pick board members, or at least have veto power over nominees."

One idea of Madden's that deserves to catch fire is the "shareholder value review" (SVR), where boards demonstrate in the annual report how they are fulfilling their duty to shareowners to create wealth. Such reviews would include three key elements:

- A description of the valuation model used to connect the firm's financial performance to its market value, plus a description of how the firm is organized and managed in order to nurture a performance-oriented culture.

- Value-relevant track records that chart the wealth-creation/dissipation performance for each of the firm's major business units.

- A description of each business unit's strategy and the related rationale for planned reinvestment or downsizing if the unit has no reasonable plan for well-above-cost-of-capital economic returns.

Again, Madden emphasizes use of XBRL in facilitating the ability of both directors and shareowners to be able to drill down through life-cycle track records to perform customized analysis. Shareowners have recently had some success in filing resolutions requesting that companies include various environmental reports in their annual reports. It would be interesting to see shareowner proposals seeking inclusion of SVRs and their eventual use by funds such as CalPERS in developing their focus lists of underperformers.

This is a great book packed with information for anyone trying to understand stock valuation and more importantly puts the recent credit bubble into perspective (govt' bailouts vs a truly free market system).

To paraphrase the book, if we look at any investment, the only real way to create and measure wealth is to have a framework that keeps track of long term performance metrics that reward good behavior, punish bad behavior and employ a feedback learning loop so the process continually improves...a life cycle framework. This is the only way a firm's actions can be tied to changes in stock price and capital can be allocated to the highest returning projects generating more wealth.

There are examples on how corporate managers and investors often focus on short term metrics such as EPS and miss the long term picture to wealth creation. This book provides a mindset and framework for investors to find companies such as Walgreens and IBM that were able to deviate from Wall Streets focus on short term earnings and create real value for it stakeholders.

Also important, and Madden hits on this in the book, is how these same principles apply to gov't actions that affect the economy. While reading this book, I kept thinking of how the government continually focuses on short term factors such as GDP and monthly PPI. How many of the current decisions by our govt are really centered around a framework discussed in this book that is proven to create value over the long term versus short term actions that help the next report on GDP?

Finally there is a great chapter on how this framework can be employed by boards of directors. At the center is a push to provide BODs a uniform framework to help them measure wealth creation over the long term. In other words, a framework that forces the discussion away from short term earnings to real wealth creation.

Reading, "Wealth Creation" helped to shape my views on what areas I should be focusing my equity research on. The book uses very relevant examples to highlight its points throughout.

The company life cycle analysis is a very good way to visualize where to look for companies when looking to target market and economic cycles.

I would recommend this book for investors who are looking to bring company lifecycle analysis into their own research and analysis, overall a great read

I go to NYU graduate school and specialize in Finance.
"Wealth Creation" helped me on fundamental analysis and brought me different perspectives.
If you want to sharpen your financial analysis skills, this is the right book for you I believe.