The Nature of Value: How to Invest in the Adaptive Economy
Nick Gogerty
Columbia University Press (2014)

“Price is what you charge. Value is what others think it’s worth.” Warren Buffett

I was reminded of Buffett’s comment while considering Nick Gogerty’s assertion that examining value creation through behavioral and systems models “will explain the ebb and flow of capital, energy, resources, knowledge, and value over time.” I agree with Gogerty that the term “allocator”” is more appropriate than “investor,” given the thrust of his rigorous examination of how and why value creation works…and doesn’t. The agents really are those who allocate the given resources.

Here in Dallas near the downtown area, we have a Farmer’s Market at which several merchants offer slices of fresh fruit as samples of their wares. In that spirit, I now share a few representative examples of the thrust and flavor of Gogerty’s style:

“Benjamin Graham correctly stated that, in the short term, the stock market acts like a voting machine, and over the long term, it acts like a value-weighing machine.” (Page 7)

“Adaptive, selective processes work the same in economy and ecology. In both cases the process is more nuanced and interesting than naturalist Herbert Spencer’s 1864 catch phrase ‘survival of the fittest,’ which he used to refer to both biological and economic processes, and which for our purposes is quite telling.” (25)

“Competitive forces and capabilities do battle in clusters of competition. Clusters are the niches in economic networks. They are the next level of system above organizations in the economic panarchy.” (98)

“Ethics are integral to managing moats and attaining success. These ethics include truthfulness about the required return on capital and truthfulness with workers, investors, and customers. Long-term thinking and constantly seeking economic truths are critical advantages for firm survival. Firms with managers who are comfortable operating in opaque or gray areas are not worth the allocator’s time or capital.” (216)

“To be right. To find and express valued true knowledge. This is the question of scientists, artists, economists, and capital allocators. Every capital allocation is based on the premise that value in the form of capital spent today will return a greater value tomorrow. The complexity associated with the nature of value promises one thing — that there is no fixed truth or absolute guarantee of wealth, value, or riches, although there are patterns and behaviors in the adaptive network that may recur.” (318)

These are among the dozens of business subjects and issues of special interest and value to me, also listed to indicate the scope of Gogerty’s coverage.

o The Misunderstanding of Price (Pages 5-9)
o The Behavioral Economic Model of Price (11-13)
o Ecology as a Model for Economy (19-23)
o Evolution: Flowing Change (39-44)
o New Capabilities Lead to New Offerings (65-69)
o Experience Curves (78-84)
o Defining Cluster Boundaries (103-108)
o Competitive Balance and Instability (112-122)
o Dominant Design and Enabling Architectures (128-132)
o Red Queen Clusters (147-157)
o Moat Depth, Moat Duration, and Moat Depth x Duration = Moat Value (173-176)
o Financial Clues for Spotting and Tracking Moated Firms (180-187)
o Consumer Belief and Perception Moats (196-204)
o Managing Moated Firms (210-213)
o Levels of Economic Panarchy: Inos, Organizations, Clusters, and the Economy (219-222)
o Inclusive and Exclusive Economies (235-243)
o Inflation’s Effects on the Allocator (282-289)

I commend Gogerty on his masterful use of various reader-friendly devices, notably the Summary section at the conclusion of each chapter. He also inserts with strategic purpose dozens of Figures throughout his lively and eloquent narrative and is a master of the bullet checkpoint lists as well as charts and graphs that focus on key points. These devices will facilitate, indeed expedite frequent review of the most important material later.

Nick Gogerty’s finial remarks also provide an appropriate conclusion to my review: “Economic value is ultimately measured in human terms. Prioritizing the value of friends, family, and freedoms ensures that the wealth of a lifetime will be correctly measured in the creation of memories, loving relationships, and a reputation for integrity. Never compromise these forms of value for mere money.”

Bravo!