There are No Developed Nations in the World

The moment you start to ask questions about things happening around you, the more interesting the results you get to see. Having lived in three different countries, I've had the good fortune to understand similar events from several perspectives to develop a viewpoint. One of the things that I find interesting is to understand why certain countries have "developed" while others are still "developing". My interest was however in understanding people and their behavior as it is attributed to those two words.

When I read news articles and commentaries that use the term developed nations, I find it fascinating to understand how different people have their own take on how they interpret their nations and their qualification for being "developed" or "undeveloped". In that mess, I fail to understand what the true meaning of a developed nation is? I personally believe that only a foolish person could have come up with such a biased view of the world in the first place. What has been developed in your nation that has not been developed in another nation?

If it is about industrialization, then yes, certain countries are surely developed. But, the larger interpretation of people in general is that developed nations have developed ideals, developed thoughts, developed behavior and a developed strength and perspective on worldly matters. This somehow has given many nations the license to decide on what are sane and truthful decisions in the world. This is where things fall apart. I haven't seen a single case of a so called "developed nation" being all of this except for being industrialized. I have however seen many of these developed nations do senseless, childish and undeveloped actions that in no way qualifies them to be developed as human beings.

Assuming industrialization happened sometime in the 18th century, it is pretty difficult to understand how building an assembly of cars, rapid mining of natural resources or doing anything with iron and steel has made people truly advanced. Materialistically yes, intellectually maybe, but as a good human being, no way! The First World War, a bunch of European nations that fought among each other, was precisely a large scale event to remember because industrialized production of stuff that can kill humans faster and better were developed. The Second World War, fought again by the same old people not happy with the human capability to produce mass destruction, was another industrialized opportunity to build something quicker to eliminate something quicker. Unfortunately, my views are blinded by the fact that I'm ignoring a very basic characteristic of a human being - to be greedy and gluttonous in life.

After those historic events came the most childish prank, a reflection of human underdevelopment and the inability to grow beyond basic animal instincts for territorial greatness - the Cold War. Two nations fought a proxy war, generated lies, masked truth and most important of all, brought money into the orbit of war games. The result was a massive wastage of the human intellect in interpreting the science behind the atom to create a nuclear arms race in the world. A developed mind would have pursued peace as the world's most powerful weapon for human development instead of a stockpile of disastrous toys. After that, there hasn't been anything worthwhile to mention when it comes to developed nations. If humans have consistently done something in the world, it has been the ability to fight against one another.

A developed country should represent people with a developed mindset. Nothing apart from wisdom through knowledge can help a person achieve this status. It is the ability to act and think beyond an animal that makes a human being a developed person. Instilling a sense of fear among others by acts of intimidation or killing may make you powerful, but degrades a human being to levels below that of an ordinary animal. After all, even an animal kills only to satisfy its hunger, not for creating a status symbol. The capability to apply wisdom and restraint in your ability to deal with people around you is what takes you closer to being a developed human being. Sharing that profound capability to control your mind and the monkey that tries to uproot it, among other people creates a developed nation.

However, there is definitely an argument that is to the contrary. "Developed" nations are not messy, unclean and troublesome to live in as compared to other "undeveloped" nations. Hence, there has to be something profoundly great about the people of these nations that the undeveloped people in other countries lack. Even I had that notion in my mind, until I lived and observed for long enough in a developed nation. The answer merely goes back to a basic characteristic of a human being. When people get what they want to lead a life (food and shelter) they become happy. When a group of people become happy due to the ability to have these basic needs satisfied at an individual level, they become peaceful socially. When socially peaceful people live in a nation, they tend to do well to others within their group. When any of these benefits are threatened or uprooted, human beings behave badly. Sometimes, this comes at the cost of denying someone else the same comforts of life.

Today's nations are merely reflections of this trend. The British lived happily when they got what they wanted even if it was at the expense of some other person's lost resources and freedom. Today, when they see that comfort being shaken by other people coming to share it, they have complained. When Americans lost jobs to outsiders, the comfort zone was shaken and they have complained. Ludicrous immigration laws, trade barriers and several other biased human strategies are reflections of that behavior. In all these there has never been the case where people pursued greatness beyond basic human greed to achieve the true status of a developed person or a nation.

Past civilizations in India, China, Egypt, Iraq and the African continent had a structure that closely resembled a true developed nation. A nation where greed or its manifestation in the form of money was not what people yearned for to achieve human greatness! History unfortunately is only a collection of half-truths. So, with only a certain possibility, we can say that there were developed nations in the past, but for certain, there are no developed nations today, and given our downward spiral, there will be no developed nations tomorrow.

Why do we build a Discounted Cash Flow (DCF) Model

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There is a lot of literature on the web explaining the importance of a DCF model and how to build one. However, as I recently realized, not many companies are focused or care enough to build an effective cash flow model to evaluate an investment. The fact that these are large corporations borrowing heavily from Wall Street makes it a matter of concern.

The fast pace of decision making in a demanding high growth technology based world has forced companies to bank on experience and/or gut feeling to make an investment. Although, this is in effect not a bad way to run a business in a highly competitive industry such as e-commerce for example, there is still what I call a "responsibility" towards adding more reasoning for strategic investments. The main reason being that the money that a company spends on its investments or excesses is actually money borrowed from investors who are expecting a return on their investment. Greedy- yes, but so is the way capitalism works.

So, when a company decides to make use of the money, they got to have a better reason as to what returns that will produce. This should go above and beyond rosy statements on what this strategy means for the company. The only way this can be done is by adding the language of finance to a strategy. This is where the discounted cash flow analysis comes into the picture. There are several other ways in which a financial analysis of an investment can be made to judge if it is sound in its fundamentals. One can look at top line or bottom line numbers and still feel comfortable about what they are getting into. The big winner among them however has been the DCF approach. Simply speaking, it goes a step further from just a limited accounting analysis and does what can be the best theoretical approach to determining a discount rate (cost of capital).

When I did my MBA, I had a hard time understanding these concepts as I was a slow convert to the field of finance. It was not until I joined my company post my MBA that I started exploring these concepts in detail. Anyways, in short, the DCF does some pretty simple and basic steps to arrive at what is called as a "Free Cash Flow" - as the term suggests, it is cash that is available for the company after it has factored for all costs related to an investment.

Starting with the sales an investment generates, we get to the EBITDA, do a small manipulation with the DA portion (Depreciation and Amortization) by including it for tax purposes and removing it for cash flow purposes, and adjust for working capital and other capital gains. In effect, once all these are meticulously done, we get to what is called as an "incremental free cash flow". This figure is what makes a DCF model better than just a simple accounting practice of arriving at the Net Income. Cash Flow is a much realistic estimate of what the company truly has in its hands after generating the required money for an investment. If the FCF is negative for a prolonged period of time, it in effect indicates that something may be wrong with the investment. Now, once the company has say $10,000,000 of cash, it now has an obligation to its investors that it needs to fulfill. Ideally speaking, it has more of a direct obligation to pay for its leveraged debt than for its equity, but in a ideal scenario, equity investors or share holders do expect some money for the shares they hold in the company.

So, there is where the discount rate comes into the picture. The discount rate is applied by using compounding on the FCF over the number of years that the investment is expected to produce sound returns. Compouding is simply used as laws of greediness dictate that money earned today is used to make more money tomorrow. So, the interest will also be invested to generate more money. The discount rate as such is also called as the "cost of capital" - the reason being that the capital (money) that a company gets has a corresponding cost (investor return) attached to it that the company needs to pay out. DCF model relies on what is called as the WACC (Weighted Average Cost of Capital) to arrive at this discount rate.

The WACC is a weighted average as it uses the D/E ratio to arrive at what portion of the discount rate (or investor return) is attributed to the debt holders and the share holders. The laws of capital markets dictate that the debt holder has the first right towards returns and then comes the share holder (provided there is anything left to give them). The debt portion is for a very funny (or greedy) reason tax deductible. Hence, it is dealt with in a different manner. The equity part of the discount rate is determined using what is called as the CAPM. A Nobel prize winning concept, it is fairly simple to understand but complicated to derive. Nevertheless, it looks into the performance of the company in the market to determine what returns the company can provide. CAPM has its own set of limitations as does the DCF model or any other financial analysis for that matter. No matter what, the discount rate or WACC eventually is applied on the FCF to determine what remains in terms of cash for the company after paying for all its obligations.

DCF model can be manipulated to suit the needs of the person building the model. This is where subjectivity in assumptions, a lack of conviction on part of the person building the model, the desire for glory on part of management to prove that their decisions are always right comes into the picture. These human interventions can in turn affect the "truth" of the model. Many people in the place I've worked claim these to be the reasons why there is no point in wasting time building such complicated mechanisms. In other words, it is a safe way to put ones inhibitions and fears on the backburner, for who wants to embarrass themselves by working on tough financial models. After all, nobody is truly judged for performance based on what they do to run a business, it is the money they generate that matters.

Then comes the NPV to make quick decision based on the DCF analysis. NPV or Net Present Value is just a way of deriving the "time value of money" of the entire investment. By bringing all the money a company makes to year 0 (starting year of investment) and subtracting it from the initial capital investment for a project, a number shows up that indicates what is the prevent value of all the money a company makes in the future on that project. The number has to be positive as if it isn't, it indicates that the investment made is not generating the required returns.

This is the DCF in short. The reason why it is important to have belief in the model and make a sincere attempt at using it is to make a relatively better objective evaluation of an investment. If greed and glory are overcome, a bad investment or negative NPV will be readily defended by a financial analyst to prevent the company from making the investment. Unfortunately, it also needs a strong commitment on the part of the largely ignored and demoralized financial analyst to face the outcome of his/her recommendation. After all, life is not fair. The DCF model may have said something but the fickle minded consumers who eventually utilize the benefits of an investment may think otherwise. The company may not make the $10,000,000 that they desired to make and the DCF analysis is to be blamed!