Discounting for growth

Over 30 years ago, the (then) City analyst Terry Smith published Accounting for Growth, sparking some controversy at the time but marking an important moment in his stellar career. He showed that smoking guns may lie hidden in listed companies, some of them detectable by a careful reading of published accounts. The tradition lives on, reflected in fund manager Tim Steer’s more recent The Signs Were There.

Both are must-read books for budding financial analysts.

They show a respect for the uncertainties inherent in investment. The diligent analyst looks for clues from existing evidence. It may require an eagle’s eye to discover the needle in the haystack. At other times, the sonar skills of a dolphin to interpret distant signals might be needed.

Good analysts are acutely aware of the hazards embedded in investment. They weigh up evidence carefully to reach fair opinions on accounts and value.

The bottom line – analysis is arduous work and an exercise in judgement.

However, at some stage over the post-Big Bang era, a ‘regressive evolution’ started (this can happen!) It involved the metamorphosis of the financial analyst from cautious sleuth to confident wizard.

A new magic was born.

Analysis morphed into a heavy dose of crystal-ball gazing, cloaked in abstract mathematical modelling to underwrite its respectability and reliability. Various plain-vanilla and more exotic formulae now dominate finance texts. Today’s analyst mechanically crunches valuations from a cocktail of estimated future cash flows and speculations on the future cost of capital.

This telescoping of the long run into the present is a good example of what the British neuroscientist Iain McGilchrist described in his masterpiece The Matter With Things, as the left-hemisphere (LH) of the brain’s ‘take’ on things - narrow, explicit, and decontextualised. This contrasts with the disposition of the right hemisphere (RH) - broad, implicit, and embedded in context.

Now, LH models in finance can be useful – but only if one remembers that they are like maps that need to be re-integrated into reality to give meaningful guidance to the terrain.

That reality has two core characteristics:

• Radical uncertainty – the title of another terrific book, co-authored by the economist John Kay and a former Governor of the Bank of England, Mervyn King. By that phrase, they mean there is a lot about the unfolding future that we simply cannot know in advance, and it is definitively not reducible to simple quantitative parameters.
• Complexity – no company can be fully characterised as a standalone cash register. It is part of a broader environment with the murkier parts of reality woven into it, including its human stakeholders. Belfast-born Brian Arthur’s classic The Nature of Technology: What It Is and How It Evolves, is still the best introduction to the idea of complexity in economics.

In an earlier post, I argued that, in financial analysis, metaphors from nature provide a better starting point than the machine – capturing the idea of the company as an evolving organism in an uncertain environment.

The simple flower is one possibility – we can learn a lot by thinking of a company as a plant.

This invites us to consider relevant questions. How does it energise itself? How strong are its roots and structure for nutrients to flow freely? How does it move from seed to bud, to bloom, and then through decline to renewal? Is there any disease? How does it interact with other organisms in its environment?

The gardener has a concern about the future but understands that its unfolding can only be known and influenced to a limited degree. The best that can be hoped for is to monitor the plant carefully and to ensure it has the best possible opportunity to flourish.

The experienced gardener and the financial detective have much in common.

In today’s world, the case for returning to the older tradition of financial analysis is strong. The very word ‘growth’ has now become so detached from reality to be rendered meaningless as a guide to how the future will unfold.

For anyone in any doubt, Partha Dasgupta’s On Natural Capital is a humbling reminder of the cost to the environment, and to our species, of conducting growth analyses for companies and countries in a narrow way, divorced from the bigger picture.

Some of what currently comes under the label of growth and is accounted for as such might better be called environmental destruction.

Future trash flow not future cash flow – smoking guns of a new nature.

Analysis without context leads to decay, in gardening and in finance. To think otherwise is half-brained, to remain comfortably numb in the abstractions of the LH.

The uncomfortable truth is that, on its own, LH thinking in financial modelling can easily lead to hubris that ends in an unpleasant way – with a subsequent crash back to reality.

What is the value of that?

Further reading:

Terry Smith - Accounting for Growth (1992). Random House.
Tim Steer - The Signs Were There (2019). Profile Books.
Iain McGilchrist - The Matter With Things (2023). Perspectiva Press.
John Kay and Mervyn King - Radical Uncertainty (2021). The Bridge Street Press.
W. Brian Arthur - The Nature of Technology (2010). Penguin.
Partha Dasgupta - On Natural Capital (2025). Witness Books.