Notes On The Conservation of Value

The conservation of value principle can be described as: anything that doesn't increase cash flows doesn't create value. 

This sounds simple and intuitive but based on the number of different company's bubble-like valuations compared to their little to none cash flows; it seems that the conservation of value principle has been forgotten. Luckily it's never been a better time than now to be refreshed on it and utilized. Why? Because unfortunately, there has been an increasing number of companies and managers trying to change the appearance of their cash flows without actually changing the cash flows. They do this by doing things like changing accounting techniques. Although a company can make their business appear more attractive by using accounting tricks and creating narratives about how their business needs to be valued differently than others because of their uniqueness, they should realize that it doesn't change the company's actual value. 

Again, this seems obvious and intuitive, but it is worth emphasizing. Unfortunately, executives, investors, and financial media often forget it to the same degree that they hope that one accounting treatment will lead to a higher value or that some new fancy financial structure will turn a crap deal into a successful one. 

A company equipped for success is one where the executives are focused on increasing cash flows rather than finding gimmicks. Executives should also use the conservation of value principle when given proposals that claim to create value but are unclear. If the manager can't pinpoint the tangible source of value creation (cash flows), then more than likely, it's a crappy illusion. 

Nutshell Summary: The conservation of value principle is advantageous because it highlights what to look for when analyzing whether an action will create value - The impact on cash flow and nothing else.