When things go bad and everyone runs for cover as a company and its stock price tanks (think Enron or Anderson) differentiating between hard and soft asset classes become increasingly important.

Hard assets are cash, treasuries, gold, real estate, and owning the Beatles Song Collection, although not as liquid (Michael Jackson's best investment) and soap. Soft assets are expiring patents, aging software, old technology or equipment depreciating in a warehouse or distribution center, and good will.

For example Microsoft has many valuable franchises but with each passing day their Windows (TM) Operating System, Office (TM) software, and many XBox (TM) games lose value and in a fire sale many would rapidly move toward worthless. However, their real estate and cash and negotiable securities are solid. Their patents probably fall somewhere in between, but I would not be the one to interpret the value of those. Running a company that consists of primarily soft assets is much more work. Technology requires constant improvement and updates. How often does the formula for soap or paper need a new formula, BTW: Google just bought their headquarters -- That I like!

Enron's rapid collapse had to do with more than lying, cheating, and stealing.

The company had sold off so many hard assets during its push to become a trading company and increase margins that when the truth bell was sounded, the soft assets, like algorithms, evaporated, leaving little more than trails of bull$hit.

Anderson Consulting, a very important company and valuable franchise at its height, saw its value evaporate almost instantly along with its reputation. See my post on that here.

Worldcom (MCI now part of Verizon), on the other hand, was only saved by having hard assets. The company's long distance lines and equipment, contracts with substantial business enterprises, real estate and Internet infrastructure, among other things, gave it the cash flow and hard core that kept the marketplace interested in them as an ongoing enterprise -- not so easily replaced, as Anderson was in accounting.

The idea of hard vs. soft assets is not one you hear discussed much when considering stock investments. But if you were a bank what you would look at?

1. Financial Statements (strength of business)

2. Cash-flow (ability to pay)

3. Hard Assets (what is the underlying equity to foreclose on)

We have all heard Warren Buffett state many times that he is not a tech guy and does not invest in tech companies because he does not understand them. I am one of his biggest fans, but this oft-stated investment perspective is a little misleading. What he is really saying in my judgment is that he prefers HARD vs Soft Assets! He likes real estate, ice cream, silver, razor blades, underwear, carpet, paint, furniture, chocolate, and insurance companies (huge cash flow and float) and other similarly 'boring things" as he refers to them. He is currently building his positions in utilities, banking and beer.

All of our Blogging Stocks have some hard assets. Apple (AAPL), eBay (EBAY), General Electric (GE), Google (GOOG), Microsoft (MSFT), Time Warner (TWX), Wal-Mart (WMT), and Yahoo (YHOO) all have envious financial statements and great cash flow.

The new kids on the block eBay, Google & Yahoo will build on their franchises over time developing hard assets and their ability to do so will be significant in the long term strength of their companies. Note that these companies significant Web presence is often referred to as "real estate" as if their virtual world was a physical place.  If they merge or are acquired it will most assuredly be by a company with "harder" assets then they have themselves. Thats what AOL did when it merged with Time Warner and it is why Time Warner shareholders were the losers.  Asset allocation is a big part of management responsibility. It should be considered when deciding what and where you invest your capital -- Unless you don't mind "going to Hell in a hand basket".

Disclosure: I was an AOL shareholder who now owns Time Warner.

Still pushing: "Dividends are very sexy -- no joke" --'cause it's important!

AND Four smart "Dubya's" you can love.