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Games people play with cash flow

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Re: Games people play with cash flow

#61

Post by pge »

tunesmith wrote: post #47

I think the argument he's knocking down is more flawed than he's letting on - specifically, just because the extra cash makes it easier to make bad decisions doesn't mean that those bad decisions will be made. The argument treats those as inexorable. If the argument had been passed through a truth checker and given a few more eyeballs, that flaw would have been obvious. That particular inner syllogism just doesn't in…

Agree - and a related is that because you don’t have 100% ownership, you have less skin in the game. The reason to tkae money is that you believe that the 80% of the company you still own will be worth more than 100% of the company without funding. So you end up with more value at stake, not less. And more incentive not to make bad decisions (and of course more people around the table with skin in the game that are motivated to help you avoid bad decisions).

Re: Games people play with cash flow

#62

Post by munificent »

There's a simpler failure mode to pay attention to that the author gets close to but doesn't notice. The original claim is "Companies should not raise capital." Any time you see a "should" claim, try adding this to the end: ", and should instead do X."

Now, when evaluating the pros and cons of the "should not" half, you have an actual relevant benchmark to compare to. It doesn't matter how awful an idea it is to raise capital in some absolute terms. What actually matters is whether it's worse than what you'd have to do instead.

Almost all decisions are about choosing one from several options, so if you find yourself making an absolute evaluation, that's a sort of "decision smell" that you should instead be doing a comparative analysis.

Re: Games people play with cash flow

#63

Post by dalbasal »

tunesmith wrote: post #47

I think the argument he's knocking down is more flawed than he's letting on - specifically, just because the extra cash makes it easier to make bad decisions doesn't mean that those bad decisions will be made. The argument treats those as inexorable. If the argument had been passed through a truth checker and given a few more eyeballs, that flaw would have been obvious. That particular inner syllogism just doesn't in…

IDK... In theory, choices are good and you can just choose the better one. In practice, the financial dynamics of a business tend to create head or tail wind forces that become a part of the company's character.

All else equal (including the decision maker), a positive float business will tend to be more growth oriented than a negative float business. In theory, not so much. Float is just a type of capital (working capital). In practice, it's different.

Other people's money businesses will tend to take more risk. Publicly listed companies tend to be risk averse and quarterly report focused. These aren't carved in stone. Some publicly listed companies (eg amazon, tesla) have sailed against this wind. But, the wind is still there.

For a personal example, take the difference between having a trainer vs exercising yourself. It's theoretically possible to do the same training and have the same results, or do better. The tendency though, is meaningful, and when you pay a trainer there's a tendency to be disciplined.

Returning to the "friend's argument," it is observably true that structural constraints affect business owners.

Re: Games people play with cash flow

#64

Post by PKop »

dissidents wrote: post #40
PKop wrote: post #37

Earlier quoted context omitted.

Isn't it sort of like Gödel's incompleteness theorem, there's no way to prove your first-principle was a correct axiom to start from. Experience will guide this. >debunk axiomatic logic itself He's not though. Your assumptions can be wrong, even if your incremental logic is correct according to the first principle. He's saying the correctness of axiomatic logic will lead you down the wrong path.

No, he is saying that he agrees with the assumptions and the way they are used to construct other propositions, but disagrees with the outcome, and therefore there must be something wrong on a higher level with the logical system itself that is being used here. I think what's actually happening here is much more banal. >Isn't it sort of like Gödel's incompleteness theorem Forgive me for being curt, but no, this is ab…

He's saying there's something wrong with getting fooled by a series of valid logical assertions into thinking the original axiom applied to the context in which one is making it... there are "unknown unknowns". There's something wrong with trusting that principled thinking will always hold because it held before, in what might have been a different context.

He's not debunking the validity of the chain of truth statements, but "first principles thinking"...letting this logic guide one down a path that doesn't comport with reality (which might have context one is unaware of).

I think it matches up with incompleteness quite well.

Any set of axioms can never tell you for sure if you're in a context that has other missing and more valid axioms.

You can modify your axioms with experience, but then you're back in the position of not knowing if this is the final set of axioms that will always comply with reality.

Re: Games people play with cash flow

#65

Post by mdpopescu »

dissidents wrote: post #38
rossdavidh wrote: post #31

Earlier quoted context omitted.

I think the idea is, when you argue from first principles, you are implicitly assuming that you know all of the relevant first principles. Since you're human and imperfect, there is always a chance that you don't. How to know? Well, empirically, check whether the conclusions you get, seem to hold up to reality. The author's experience was that taking investment $$ was necessary (or at least often useful) in a startup…

Thanks Ross for the reply. I believe that this is a misunderstanding of how propositional logic works. If the propositions or axioms that you start with are sound, and if you correctly apply all inference rules, then the propositions that you derive will also be sound. "Missing axioms" that you did not use do no matter, regardless of their soundness.

Of course they matter. We're discussing arguments that apply in the real world, not in math theory.

In math, if you have this axiom:

  f(x) > 5 for all x >= 20
you are not then allowed to change it with a later axiom

  except when x is divisible by 240
However, in real life this happens a lot. I have a company that is taxed a fixed amount per year... except for the years where I make over 100k euros, in which case things become quite complicated. If I omit the second part (which is not impossible, given that I never made over 100k euros a year with that company), and suddenly get a big payout from someone, the result will be very different from my initial estimation - as sound as it was WITHOUT that additional axiom / assumption / rule.

Re: Games people play with cash flow

#66

Post by PKop »

dissidents wrote: post #38
rossdavidh wrote: post #31

Earlier quoted context omitted.

I think the idea is, when you argue from first principles, you are implicitly assuming that you know all of the relevant first principles. Since you're human and imperfect, there is always a chance that you don't. How to know? Well, empirically, check whether the conclusions you get, seem to hold up to reality. The author's experience was that taking investment $$ was necessary (or at least often useful) in a startup…

Thanks Ross for the reply. I believe that this is a misunderstanding of how propositional logic works. If the propositions or axioms that you start with are sound, and if you correctly apply all inference rules, then the propositions that you derive will also be sound. "Missing axioms" that you did not use do no matter, regardless of their soundness.

This is the entire crux of the article's critique of first-principles (axiomatic) thinking being a full-proof way to guide decision-making.

The inability to logically prove that first principles comport with, or not, (some unknown) aspect of reality due to missing information.

"The map is not the territory", "unknown unknowns" come to mind...

Re: Games people play with cash flow

#67

Post by dissidents »

tunesmith wrote: post #56
dissidents wrote: post #38

Earlier quoted context omitted.

Thanks Ross for the reply. I believe that this is a misunderstanding of how propositional logic works. If the propositions or axioms that you start with are sound, and if you correctly apply all inference rules, then the propositions that you derive will also be sound. "Missing axioms" that you did not use do no matter, regardless of their soundness.

A "missing" axiom, in my experience, is not truly a missing axiom that otherwise has no impact on other axioms. A "missing" axiom is one that exposes a bad assumption in another axiom currently being relied upon. For instance. Socrates is a man, all men are mortal, therefore Socrates is mortal. But then you discover that a couple of eons have passed and Socrates is still alive. Clearly there must be a "missing" axiom…

Again, I am sorry for being direct, but this does not make sense. If a Venusian man is immortal, then the "axiom" (preposition) that all men are mortal is false. In other words, the issue is not that the preposition "Socrates is Venusian" was missing but that the preposition "all men are mortal" is false.

It is possible to develop significant mathematical theory without using some axioms. For example, mathematicians sometimes choose not to use the "axiom of choice" when working with Zermelo–Fraenkel set theory. That does not mean that mathematical theorems proven without using the axiom of choice are invalid, even if you later assume that this axiom is true (or false).

Re: Games people play with cash flow

#68

Post by dissidents »

mdpopescu wrote: post #65
dissidents wrote: post #38

Earlier quoted context omitted.

Thanks Ross for the reply. I believe that this is a misunderstanding of how propositional logic works. If the propositions or axioms that you start with are sound, and if you correctly apply all inference rules, then the propositions that you derive will also be sound. "Missing axioms" that you did not use do no matter, regardless of their soundness.

Of course they matter. We're discussing arguments that apply in the real world, not in math theory. In math, if you have this axiom: f(x) > 5 for all x >= 20 you are not then allowed to change it with a later axiom except when x is divisible by 240 However, in real life this happens a lot. I have a company that is taxed a fixed amount per year... except for the years where I make over 100k euros, in which case things…

This has definitely nothing to do with any of what I said.

Re: Games people play with cash flow

#69

Post by bluejellybean »

If you liked this article and want to learn more about the games played in corporate finance, I would strongly recommend a book a colleague of mine recommended, "The Quest For Value". This single book had completely changed my view of the business world more than any other, and it gives one a much clearer understanding of the massive debt load that the United States operates under. I grew up and lived through the 08 financial crisis, losing a home in the process, and hated debt of any sort. Now that I've read this book cover to cover multiple times, my view has completely shifted, and my understanding of stock valuation and cash flow analysis has done nothing but improved.

Re: Games people play with cash flow

#70

Post by [deleted] »

thaumasiotes wrote: post #53
nthj wrote: post #22

Earlier quoted context omitted.

Lodging must meet specific rules, or the fair market value of the lodging must be declared as W2 income. https://smallbusiness.chron.com/taxability-employerprovided-...

It's not so easy to establish the fair market value of something that never goes on the market.

[deleted]
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