It is a situation that John Law, the Scotsman who managed the finances of 18th-century France, would recognise at once. The man who invented the use of paper money and convenient credit, Law created a boom in a recession-hit France the like of which had never been seen before – nor, for that matter, since. It was during this boom that the word “millionaire” was first used. In the subsequent crash, it was said: “John Law has made rich rogues and bankrupts of honest men.” Voltaire remarked that things were as they should be: as a result of the crash, paper money had returned to its intrinsic value. Strangely, the French economy benefited from both the boom and the crash. Inflation caused by the crash reduced the national debt, while the boom stimulated the French economy out of recession.
It is beyond imagination to believe that such a fate might befall Internet stocks and the world’s economies today – just as it was beyond imagination to believe that a crash would occur in Law’s day. It has always seemed to me that certain – indeed most – of these Internet companies are highly speculative and it therefore came as no surprise to me when investors started to move their funds from construction companies into Internet stocks.
My father used to say, and he attributed these words to his grandfather, that “no one should own a construction company who could not start one”. The reason Sir Robert McAlpine took this view was that the accountant who could accurately value a construction company did not exist. It will no doubt occur to those reading this article that my great-grandfather’s advice may be out of date. Sadly, this is not the case.
The management of contractors should privatise their companies as soon as possible
Accountants of the 21st century may well be cleverer than their colleagues in the 19th, but the fact of the matter has not changed: it is still extremely difficult to put a value on a construction company. Construction is a business not so different from the Internet companies – the return on capital is colossal, the risk to that capital is equally large. Each of these spheres of enterprise also has this in common: it is virtually impossible to know what is going on in the company, whether success is really as great as we are told, or failure so easy to control.
The reason for this is simple: the people involved often do not realise the risks that they are taking. Optimism is the name of the game both in construction and in Internet venture. Optimism and an infectious enthusiasm. And as for the victims of these companies when they fail, the greedy investors, it may well be that in time the fashion will change and investors will leave Internet stocks. If that is the case, one thing is absolutely certain: they will not reinvest in construction companies.
