Sure you have seen these headlines:
- “Zuckerberg loses a $16bn in a day”
- “Bill Gates is worth over $100bn”
- “Kanye is now worth $3bn”
Net worth is a point in time measure. It fluctuates almost daily. Depending how liquid you are, it can fluctuate by A LOT.
What’s “liquid”? Liquid isn’t just a finely crafted single malt. It’s how easily you’re able to convert assets into cash.
Let’s say you drive a Ferrari & own a Camps Bay villa. It’s 3AM and you find yourself at the garage buying a Red Bull. Can you pay using your house? No. You need actual cash on hand!
Zuckerberg has 410m shares of Facebook. FB stock is now at $190. That gives him a net worth of about $78bn. If FB stock slides to $170, he’s now worth $70bn. Did he actually just “lose” $8bn?! No, because he hasn’t sold a single stock. The fancy finance term is “unrealized”
Hands down, Comeback Kanye West is an incredible story. Bankruptcy to Billionaire. If he’s worth $3bn, how much cash do you think he has immediate access to at any given second? $1bn? $2bn? All of it?
He has $17mn in cash & $35mn in stocks. The rest is tied up in non-liquid assets.
Kanye owns 100% of Yeezy. Adidas produces & distributes them. He gets most of the profits right? No. He gets royalties of 15% of the sales and it’s closer to 10-11% after expenses. Basically, Kanye makes 10c for every $1 in Yeezy sales.
Depending on the valuation multiple you apply on his stake, he’s worth at least $1.4bn. That’s based on an EV/Sales multiple of 10x applied to $140m in top line (2019). Naturally he believes he can double the business in 5 years & that’s actually not a outlandish estimate.
Liquidity is a HUGE problem for companies exiting stakes. In mergers & acquisition (M&A) deals, you see it all the time. There’s usually a “liquidity discount” for highly specialized or hard to sell companies. Sometimes it’s up to a 30% haircut depending how desperate the seller is.
Cash is King.
In good times, you want cash to work for you & generate more cash through leverage, productive assets & disciplined cash management. In bad times, you want to be overweight cash & risk exposed.
What’s the point of being ultra-rich if you can’t spend it?