As I write this on December 5, 2024, we are in the midst of what many are calling the ‘everything’ bubble. Bitcoin has just passed $100,000.00 per coin, for the first time. Home prices continue to rise, while home availability and affordability increase. Inflation continues to remain high, though it has ticked down a bit in the past few months. The S&P 500 and other major stock market indexes are at all-time highs. Gold is high, if precious metals are your investment of choice. Meanwhile, unemployment numbers remain muted and the economy continues to chug along coupled with our nation’s ever expanding national debt. It is a decent time to be a business owner, despite the increased cost of debt, as a rising tide lifts all boats. Business valuations are also, in many instances, high.
Divorce and the ‘Everything’ Bubble
What does all of this mean in the context of a divorce? Specifically, divorce for a business owner?
For one thing it means you will want to be careful, as always, in trading across commodity types. Although none of us have a crystal ball, you may want to be careful in taking on a larger share of cryptocurrencies, for instance, which may be due for a correction, versus simple cash. As always, you must also keep in mind the tax impacts of any asset category. Roth-IRA’s and cash are treated much differently from 401(k)’s or traditional IRA’s.
One should also be wary of the concept of “Adverse Selection” in negotiating. This is a cognitive bias where one person in a transaction has more information than the other. It’s why smart general managers should be weary when a team offers them a “top prospect.” Nobody knows that prospect – has been placed in a better position to evaluate them – than their own team. So when that on-paper five star athlete is offered up at fair or even below market value, the other team’s general manager should keep in mind “adverse selection.” Perhaps the star athlete has a substance abuse problem, an injury history, character flaws such as a lack of hustle, or a lack of passion for the game.
Adverse Selection and Divorce
In Michael Lewis’s recent book “Going Infinite,” adverse selection is described as follows: “…The person most eager to make a bet with you is the person you should be most worried about betting against. When people wanted to bet – or trade – with you, there was usually a reason: they knew something you did not…The first thing you did when someone offered you a bet was to make sure you weren’t missing what they might know. Some piece of information. Some non-obvious angle to the problem. Lots of bets looked stupid after the fact because the person on the receiving end hadn’t thought about why a bet had been proposed in the first place…”
And is this not a primary issue for business owners going through a divorce? Who knows your business better than you? And therefore, your non-business owner spouse (and their attorney) are going to have a hard time trusting you when it comes to valuation. Not even the experts they hire will be better positioned than you to understand where the business currently stands and where it is likely headed. And this makes negotiations very tricky.
With most businesses, valuation is complicated enough. And with most divorces, there is already a lack of trust between the parties. Now, like a snake, these complexities circle back on themselves: because if everything is inflated, including your business, then the last thing you want to do is trade away other real assets against the inflated value of your business. Meanwhile, the last thing the other side wants to do is assume the current high valuations are temporary, or provide some sort of insurance that takes into account such risk.
Same thing for real estate. We have seen the average price of vacation homes at our Jersey shores increase around three-fold since the start of the pandemic. By any measure, such homes may now be overpriced (though, markets being irrational as they are, who is to say). And there are articles stating that certain of our shore towns will be flooded by global warming in the coming decades. Other than forcing a sale of such homes and splitting the difference, it is a tricky time to work toward a buy-out provisions in a divorce agreement for such homes. The valuation of such homes are, as with many asset classes, mired in a Schrödinger’s Cat-esque existence, being both overpriced and underpriced simultaneously.
Divorce and Black Swan Macro Events
Add to this ‘everything bubble’ the increase in ‘black swan’ events, both nationally and internationally, and it seems hopeless to properly value anything. Particularly as we prepare for a new inauguration with a familiar face.
Working to pair asset classes, to deleverage risk whenever possible, and to keep in mind these issues is key in effectively negotiating a divorce agreement as we look toward 2025. In this way, you can minimize your exposure to the ‘everything’ bubble, which in some ways comes with many gifts. Our businesses are worth more than ever before, our homes can sell for high prices, and the stock market is outpacing inflation. At least as of today. But we must keep in mind that markets are always fluid. Keep in mind Warren Buffet’s old advice to “be fearful when others are greedy and greed when others are fearful,” and negotiate accordingly.