Corporate Valuation for Portfolio Investment E-Book

Robert A. G. Monks

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg Professional
• Sprache: Englisch

Seitenzahl: 791

Veröffentlichungsjahr: 2010

Beschreibung

A detailed guide to the discipline of corporate valuation Designed for the professional investor who is building an investment portfolio that includes equity, Corporate Valuation for Portfolio Investment takes you through a range of approaches, including those primarily based on assets, earnings, cash flow, and securities prices, as well as hybrid techniques. Along the way, it discusses the importance of qualitative measures such as governance, which go well beyond generally accepted accounting principles and international financial reporting standards, and addresses a variety of special situations in the life cycle of businesses, including initial public offerings and bankruptcies. Engaging and informative, Corporate Valuation for Portfolio Investment also contains formulas, checklists, and models that the authors, or other experts, have found useful in making equity investments. * Presents more than a dozen hybrid approaches to valuation, explaining their relevance to different types of investors * Charts stock market trends, both verbally and visually, enabling investors to think like traders when needed * Offers valuation guidance based on less quantitative factors, namely management quality and factors relating to the company and the economy Corporate Valuation for Portfolio Investment puts this dynamic discipline in perspective and presents proven ways to determine the value of corporate equity securities for the purpose of portfolio investment.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Foreword

Preface

Acknowledgments

CHAPTER 1 - Corporate Valuation for Portfolio Investment A Philosophical Framework

Valuation Defined

The Importance of Equity

Equity Defined

Articles of Faith Undermined: Securitization at Risk

Benefits of the Equity Marketplace

The Flexible Nature of Equity Capital

Long-Term Superiority of Equity over Debt—with a Caution about Volatility

The Focused Nature of Valuation for Investment

Two Main Sources of Information about Equity

Financial Reports: Issues with GAAP and IFRS/IAS

Sources of Complexity in Accounting for Company Value

Reforming GAAP and IFRS

The Problem of Fair Market Value: Reporting Values for Securities with No ...

Three Studies

The Need to Read between the Lines

Human Nature Complicates (but Also Informs) Equity Valuation

George Soros’s Concept of Reflexivity

Other Paradoxes in Equity Investing

The Observer Effect

Human Nature as the Key to Equity Value

Need for Expression in Currency Values

On Financial Mathematics

In Closing: About This Book

A Range of Approaches

Notes

CHAPTER 2 - Valuation Based on Assets

Overview of Assets as a Unit of Valuation

An Opening Caveat: The Limitations of Accounting Numbers

Accounting Numbers: Why Assets as a Starting Point?

Definition of an Asset

Flow-Dominant vs. Value-Dominant Assets

The Market Premium and Nonmarket Discount

Bear Stearns: A Cautionary Tale

The Asset-Focused Investor

Current Asset Value

Taking Clues from Assets

The Sykes Model

Beyond Assets: Clues from Liabilities and Equity on the Balance Sheet

The Role of the Appraiser and Appraisal Standards in Valuing Assets

Fair Market Value Treatment Assets

Fair Value of Assets Under FASB (GAAP) and IASB (IFRS)

Valuing Intangible Assets on the Balance Sheet

Valuing Intangible Assets That Are Not on the Balance Sheet

Using the MD&A for Insights on Assets

Improvements in Fair Value Disclosures: A Checklist for Investors

Asset-Based Valuation by Industry

Special Topics in Asset Valuations: Valuing Assets in Pension Plans

Lens Check

Conclusion: Asset Values in Bailouts

Appendix 2.1: Common Ratios, Multiples, Averages, and Algorithms Based on ...

Appendix 2.2: Asset-Based Approach to Business Valuation (American Society of Appraisers)

Notes

CHAPTER 3 - Valuation Based on Earnings (Income)

Earnings Defined

Types of Earnings

Operating Earnings Are Key to Value

Earnings Are Relative to Revenues and Expenses

Earnings Are Ultimately Based on Assets

Hard Times Reveal Earnings-Asset Connection

How the Standard Setters Currently Define Earnings

A Brief Pause to Look at Our Compass

The Other Side of the Equation: Revenues Minus Expenses

How XBRL Can Connect the Dots between Earnings and Assets

Earnings Management and Fraud

Earnings Caveat from a Sage

The Quality of Earnings

Models to Assess Earnings

Earnings Guidance: A Waning Trend?

Consensus Earnings Programs

Earnings Examples

EPS: An Emerging Standard

Earnings-Based Valuation by Industry

Impact on Industries of New Global Accounting Standards for Revenue Recognition

Is a New Earnings Measure Needed?

Lens Check

Conclusion

Appendix 3.1: Hoover’s Definitions of Basic Income Statement Terms

Appendix 3.2: Ratios and Other Valuation Indicators Using Earnings

Appendix 3.3: Net Income Example

Notes

CHAPTER 4 - Valuation Based on Cash Flow

Cash Flow Statements—Something Old, Something New for Investors

Value and Liquidity

Cash Flow: What the Global Standard Setters Say

What the Cash Flow Statement Shows

Accounting Note: Converting an Indirect Method Statement of Cash Flows to a ...

DCF: Projecting Future Cash Flow

Crystal Ball: Two Kinds of Questions

Some General Methodologies for Considering Cash Flow

Cash Flow from Projects: What Investors Should Know

The Work of Alfred Rappaport

Using Monte Carlo Simulations for Future Cash Flow Estimates

Using Cash Flow to Calculate Amortized Cost

IFRS Impact on Cash Flow

Cash Flow Patterns in Industries

Lens Check

Conclusion

Appendix 4.1: AT&T Example

Appendix 4.2: ASC 230 Summary

Appendix 4.3: Summary of IAS 7

Notes

CHAPTER 5 - Valuation Based on Securities Prices

Overview of Securities Prices

Definition of Stock Price

Seven Basic Points of Departure to Determining the Value of a Security

Approach 1: Ratios or Formulas That Include Stock Prices

Approach 2: Technical Analysis of Stock Price Movements

Approach 3: Analysis of Values According to Efficient Market-Random Walk Hypothesis

Approach 4: Stock Valuation Based on Expectations

Approach 5: Valuations Implicit in Algorithmic Trading

Approach 6: The Black Swan Approach to Stock Price Valuation

Approach 7: Reflexivity Theory and Stock Values

An Overview of Chaos/Complexity Theory

Securities Valuation as an Asset on the Balance Sheet

The Duff & Phelps Valuation Model

Revisiting Mark-to-Market

Can We Bring Back the Equity Premium?

Reconnecting with the Good Old Capital Asset Pricing Model

Stock Price Patterns in Industries

Lens Check

Conclusion

Notes

CHAPTER 6 - Hybrid Techniques for Valuation

Building vs. Buying a Model

A Word about Building a Model Within a Model

Words of Caution

Fourteen Approaches

Using Metrics to Measure Management

A Basic Distinction: Residual Income vs. Discounted Cash Flow

Out-of-the-Box, or Generic, Valuation Models

Reconciling the Balance Sheet and Income Statement

Reconciling the Income Statement to the Statement of Cash Flows

A New Balance Sheet Metric

Use of Hybrid Valuation Approaches in a Key Industry: Energy

Concluding Caveat and a Fifteenth Model

Appendix 6.1: National Standard Company: Description of Bonus Plan Based on EVA

Notes

CHAPTER 7 - Market Value Drivers of Public Corporations Genius, Liberty, Law, ...

The Nonmarketability Discount

Six Key Elements

Element 1: Genius

Element 2: Liberty

Element 3: Law

Element 4: Markets

Element 5: Governance

Element 6: Values

Long-Term Investing

A Note on Valuation for Divestment

Conclusion

Appendix 7.1: Rating Governance

Appendix 7.2: Enhanced Business Reporting Framework

Appendix 7.3: The Caux Round Table Principles

Appendix 7.4: Trucost

Notes

CHAPTER 8 - Situational Valuation Equity Values throughout the Corporate Life Cycle

Scenarios

Valuation of Shares Under Public Policy Pressure: A Story in Medias Res

Valuation of Shares at Par (or No Par)

Valuation of Shares in IPOs and Secondary Offerings

Valuation of Shares upon the Declaration of a Dividend or a Stock Split

Valuation of Shares in Buybacks

Valuation of Shares in Companies with Underfunded Defined Benefit Pension Plans

The Example of Endowments

Valuation of Shares Tendered, Exchanged, or Retained in Mergers or Acquisitions

Valuation of Shares in Spin-Offs and Divestitures

Valuation of Shares Impacted by Shareholder-Led Governance Changes

Valuation of Shares in Companies in the Zone of Insolvency or Filing for Bankruptcy

Valuation of Shares in Companies Emerging from Bankruptcy

Conclusion

Notes

CHAPTER 9 - Conclusion

Need for Humility in Valuation

A True Beauty Contest

No Single Definition for Valuation

A Word about Genius

Real Impact

A Need for Investor Talent

Looking for the Story

On the Social Impact of Corporations and Investors

Work in Progress

Notes

APPENDIX A - Equity vs. Debt Securities A Global Definition

APPENDIX B - Basic Accounting Concepts for Corporate Valuation

APPENDIX C - Convergence of Global Standards FASB, IASB, and Their Joint ...

APPENDIX D - Report to the Congressional Oversight Panel Regarding Fair Value ...

APPENDIX E - The Use of Mathematics in Finance

APPENDIX F - The Modigliani-Miller Theorems

APPENDIX G - Uniform Standards of Professional Appraisal Practice (USPAP)

APPENDIX H - Global Industry Classification Standard (GICS) Sectors and ...

APPENDIX I - Damodaran Spreadsheets for Valuation

APPENDIX J - Monte Carlo Simulation for Security Investments

APPENDIX K - Antivaluation! Human Valuation and Investment Foibles

APPENDIX L - Fair Value Measurement of Derivatives Contracts

APPENDIX M - Final Report of the Advisory Committee on Improvements to ...

APPENDIX N - Valuing Values

APPENDIX O - XBRL Guidance

APPENDIX P - Pension Fund Valuation Guidance

APPENDIX Q - Stock Indexes

APPENDIX R - U.S. Business Cycle Expansions and Contractions

APPENDIX S - Wisdom from Norway Two Speeches from a Norwegian State Pension ...

Recommended Reading on Corporate Securities Valuation

Index

Copyright © 2011 by Robert A. G. Monks and Alexandra Reed Lajoux. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rose-wood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

ISBN 978-1-576-60317-8 (cloth); ISBN 978-0-470-88074-6 (ebk); ISBN 978-0-470-93675-7 (ebk); ISBN 978-0-470-93676-4 (ebk)

To John P. M. Higgins, who has for a half century explored with me the challenges of valuation.

—RAGM

To Stella Swingle Reed, who taught me the value of perseverance.

—ARL

Foreword

A SMALL FRACTION of cohorts who lived through the age of the Nifty 50 still tackle important problems. We don’t know that the torch has been passed, as an earlier president reminded us. We forgo shuffleboard and leisure suits for writing and mounting platforms on issues that we believe to be important—where we can bring our personal experiences to bear and where our voices will remind others that we bring personal history, energy, and foresight to vexing problems. Bob Monks is the archetype of the group.

We will get to his capabilities shortly, but let us first examine Bob’s courage to tackle a really big topic: the valuation of securities. It is as big a subject as they come, running in multidimensions from qualitative to psychological, from static to dynamic, from one dominant measure to a complex soup, and using measures that range from those that are internal to the observer to those determined by the markets. He categorizes the enduring tussles between momentum speculators and fundamental investors (as they often label themselves) and bravely wades into academe and critically tackles anyone, from Nobels to postdocs. Nothing escapes his attention.

Many investors aspire to universal skills, often proclaiming to be rotating specialized investors in the changing days of one valuation mode to another. In truth, most of us adopt a valuation scheme that is suited to the nature of our psyche. We search for nomenclature that proclaims its wisdom; we quest for indices that illustrate our brilliance; and we market . . . oh, we really market.

In Corporate Valuation for Portfolio Investment, Bob and his worthy coauthor (more later) cover the full range of valuation methods. We are reminded how narrow most of our outlooks really are. Our normal style as investors in public securities, usually as fiduciaries investing for others, is to examine, select, implement, measure, and report . . . with some ingredient of hope and justification. But Bob’s stamp on this book is clear. As in life, so in this book he goes to a rare and important next step. He adds the active behavior of someone who behaves as if he owns the entire business and sends a message to institutional shareholders who tend to rely on buying or selling to express their views to management.

He and I reached the same conclusion independently at about the same time, he as assistant secretary of labor for ERISA [Employee Retirement Income Security Act], and I while chairing a governance committee at the Securities and Exchange Commission. Back in the private sector we shared valuation insights, models, and spreadsheets. I went the next step in aggressively voting against directors who supported protective measures against shareholders and announced our actions—practices unheard of at the time. Bob started an investment management enterprise, the Lens Fund, to invest in potential target companies, announcing plans for some to improve their accountability to owners. Whereas institutional investors typically vote proxy statements with management, without even knowing the individual positions of directors receiving their endorsement, Bob makes his views known. He lays out a clear program.

He is an active investor in large publicly traded securities that need, but normally fail to get, attention from investors who take a position and then aggressively attempt to change companies in directions of greater value. Thus, his focus on valuation is a natural complement to his governance activities. He has to know how to start at a low enough price to provide a cushion for the time it takes to implement his approach. He is usually attracted to a yield sufficient to finance his efforts. He has to develop a cogent program that has not been adopted by the directors charged with just that job. And, finally, he has to have the credibility to make it work. The list of major companies who have felt his attention looks like a typical high-quality list, but the members of that list are better now in hindsight than when Bob and his staff first visited them.

Rarely do companies welcome the interference from someone who proposes to alter their clubby atmosphere. But his investment record is a clue that his ideas, when implemented, work. From its founding in 1992 until it became part of the Hermes Pensions Management group in 2000, activities of the Lens Fund were followed by such august publications as Barron’s and the New York Times. As noted in the Times: “Lens’s investing style pays. In six years of operation, through Dec. 30, 1998, it returned 25.1 percent a year, on average, compared with 20.5 percent for the Standard & Poor’s 500-stock index.” Well-known shareholder activists like Boone Pickens and Carl Icahn are disruptive and make their intentions to fire managements well-known. It is not surprising they would be met by vigorous objection. Bob Monks, on the other hand, comes in with a plan that can be implemented by the existing management. His proposal is more about accountability than disruption. He too meets with objection but less so than others storming the corporate gates with devastating firepower.

Bob’s colleague in this endeavor, Dr. Alexandra Reed Lajoux, brings her own long history to the quest for better approaches to corporate valuation. Alex, who has served as editor of a variety of influential business periodicals, is the lead author of The Art of M&A series of books and, through these and her many other writings, is an ardent proponent of the overarching principle of stewardship and long-term sustainable value creation.

Bob and Alex wrote in the Preface: “We wrote this book to advance world prosperity by explaining how to determine the value of corporate equity securities for the purpose of portfolio investment.” Together, with records of success improving corporate accountability in their hip pockets, they are ready to storm—tactfully—the barriers to full understanding of what constitutes sustainable value.

DEAN LEBARONAdventure Capitalist

BOSTON AND ZURICHDeanLeBaron.com

Preface

WE WROTE THIS BOOK to advance world prosperity by explaining how to determine the value of corporate equity securities for the purpose of portfolio investment.

A number of recent changes have made this subject lava hot: international accounting conundrums, massive transformations making both forward and backward comparisons meaningless, low inflation with rumors of deflation, and—now—government-created assets and earnings! These volcanic trends have brought equity valuation nearly to a meltdown. Yet certain truths remain.

Equity capital provides two main benefits: a flexible funding option for companies and superior returns to investors compared to debt. But unless an investor can buy every stock and hold all stocks for decades, the long-term, general superiority of equity over debt is of little use. To take advantage of equity’s power, investors must learn how to put a precise value on a specific stock for a specific investment period.

This book advocates a multidimensional approach to equity value, asserting that value exists only in specific temporal and situational contexts. This said, the “default setting” for investment appropriately remains an intelligent investor considering public equity securities as a choice among alternatives.

Corporate valuation for portfolio investment means determining the present value of future worth. There are two main sources of information about the worth of a stock: financial reports and the stock’s current trading price.

Financial reports contain riddles that must be decoded by the valuation-minded investor. The first step in valuation for investment is to bridge the gap between current valuation in financial reports and the future value of the company for investment purposes. Despite the work of numerous groups to reform generally accepted accounting principles (GAAP) and their global equivalent, international financial reporting standards (IFRS), financial reports remain only dim mirrors of company value. Sources of complexity in GAAP/IFRS accounting include variation in accounting models, scope exceptions, mixed attributes, and bright line standards.

All this requires reading between the lines. And the main message is that equity securities are difficult to value in part because both companies and the markets that trade in their equity are living human systems prone to self-deceptive traits that militate against pure valuation logic.

Paradoxically, however, human nature, which makes the valuation of equity so difficult, is also the fundamental reason for the superiority of equity. Value-minded investors can put a financial value on the greatest contributor to securities’ value: long-term corporate action based on vision. To do so, however, requires a multifaceted approach to valuation, including both respect for quantitative fundamentals and an appreciation for qualitative complexity.

This book, intended for the professional investor building an investment portfolio that includes equity, takes the reader through a range of approaches, including those primarily based in assets, earnings, cash flow, and securities prices, as well as hybrid approaches. It also discusses the importance of qualitative measures that we call “governance” (going well beyond GAAP/IFRS) and addresses a variety of special situations in the life cycle of businesses, ranging from initial public offerings to bankruptcies.

In the process, the book offers formulas, checklists, and models that we and others have found useful in making equity investments. As long as investors thoughtfully use a variety of tools to make their investments, corporate securities will continue to generate wealth for their owners and for society at large.

Acknowledgments

MANY INDIVIDUALS HELPED us write our tome; the chapter endnotes name them. But special acknowledgment goes to those who corresponded with us and/or consented to be interviewed during the actual writing of this book (January 2008-June 2010).

Matthew Bishop, bureau chief for The Economist, New York

Steve Brown, founding partner and chief investment officer, Governance for Owners, London

Paul Druckman, chairman, Executive Board of The Prince’s Accounting for Sustainability Project, London, United Kingdom

Robert Ferris, executive managing director, RF|Binder, New York

Phillips Johnston, analyst, Dawson Herman Capital, New York

John P. M. Higgins, president and chief investment officer, Ram Trust Services, Portland, Maine

Dean LeBaron, founder, Batterymarch Financial Services, Geneva, Switzerland

Rocky Lee, partner and head of Asia Venture Capital and Private Equity, DLA Piper, Hong Kong

Colin Meyer, dean, Said School of Business, Oxford University

Deborah Hicks Midanek, principal, Solon Group, New York

Lester Myers, professorial lecturer, Georgetown University

Mark Mills, director, Generation Management, London

Paul Pacter, IASB, Hong Kong and London

Al Rappaport, cofounder, LEK-Alcar Consulting Group, La Jolla, California

Anthony Riha, vice president, Bowne Asia, Beijing

George Soros, founder, Soros Fund Management, New York

Allen Sykes, economist and author, London

Raj Thamotheram, senior adviser, Responsible Investment, AXA Investment Managers (AXA IM), Paris

Simon Thomas, chief executive, Trucost, London

Stephen Young, executive director, Caux Round Table

We would also like to acknowledge the encouragement and guidance that we received from the Bloomberg Press team that launched this project, including JoAnne Kanaval, Stephen Isaacs, Mary Ann McGuigan, and Fred Dahl. We also thank the professionals of John Wiley & Sons, including Bill Falloon, Emilie Herman, Tiffany Charbonier, and Todd Tedesco. Artist Mary Graham (mary@oakinsights .com) helped illustrate some of the concepts we discuss in Exhibits 2.1, 5.1 through 5.11, and 6.1. We are grateful for her unique combination of mathematical, artistic, and technical genius. The contributions of these individuals, as well as many others, prove an important point: published books convey knowledge at a level the blogosphere will never match.

Bob extends special thanks to his colleagues Nell Minow, Ric Marshall, Sylvia Aron, and Christine De Santis for their usual superb help.

Alexandra thanks her family, friends, and colleagues past and present at the National Association of Corporate Directors.

CHAPTER 1

Corporate Valuation for Portfolio Investment A Philosophical Framework

EQUITY SHARES must be valued—but how? It may seem that sophisticated financiers have taken over valuation. The phrase “equity valuation” may conjure up visions of financial specialists feeding numbers into algorithmic programs, relentlessly making buy, sell, or hold decisions unrelated to the operating realities of businesses or to understandable economic concepts such as replacement value.1

A great deal of controversy surrounds the mathematicians and physicists (aka “quant jocks”) on Wall Street. Some blame them for the economic problems of the first decade, noting their complex trading programs that, once automated, accelerated doomsday events for markets.2 Others say that the quant jocks boosted the overall intelligence of the market by introducing new and sensible ways of looking at risk and return, pointing out that they were among the first to warn against the crisis.3 In fact, sophisticated trading programs do have a role to play, but the programs must be based on sound principles. Sophisticated trading activities are the symptom, not the substance, of stock valuation.

In fact, valuation begins from the hour a company’s leaders find equity investors who believe so strongly in the company’s economic prospects that they are willing to provide capital for it, no strings attached. This belief in a company’s future—in a word, hope—is what makes the value of the stock something more than the current value of all its assets, if sold in a fire sale. Combined with the investor’s own time horizon for a return, hope is the key to securities valuation. Vision and time are the alpha and omega.

Valuable vision is what propels a company’s stock into the marketplace; it is what preserves the value of the stock in spite of market chaos. Understanding this concept requires an integrated theory of valuation that includes consideration of assets offset by liabilities, of income, of cash (liquidity), of securities market dynamics, and of comparable pricing. Understanding also requires consideration of what we call stories—meaningful information beyond the financial statements and market prices. This book is structured accordingly.

Of course, not all investors base their trades on such an integrated framework for valuation. Some are index investors, some are algorithmic traders, and some are fund managers who buy assets based on classes of risk. In fact, fewer than half of all investors actually choose an investment based on the quality of a particular company.4 It is for these happy few volitional, value-minded investors that this book is intended.

Cost/Benefit of Information Gathering

There is also the issue (which I found out in the S&P strat5) of the price of gathering data. One of the reasons such simple strats exist is the cost of gathering the information you need to implement them is fairly high compared to the payout. Would I be better off screen scraping all the livelong day to implement some lousy subjective strat with a low Sharpe6 anyway? Or would I be better off getting a job at a bank, making a lot of money, and buying bonds?”

—Posted by Scott Locklin at the Algorithmic Traders Discussion Board on LinkedIn.com, April 19, 2009.

Valuation Defined

Valuation means determining a value for something. This book sets forth all the elements of a company that are to be valued and offers guidance on how to determine those values.

• Corporate valuation determines the worth of a corporation today (its present value); valuation for portfolio investment joins that present value with a future value. As Al Rappaport said so succinctly in Expectations Investing, the key to successful investing is “to estimate the level of expected performance embedded in the current stock price and then to assess the likelihood of a revision in expectations.”7

• Expectation is indeed a fitting word for the process of valuation for investment. “Valuation” comes from the Latin word —to be worth something in an exchange.“Investment” derives from —to clothe. It means exchanging money now for something that may offer more money in the future.