I’ll admit to geeking out a bit this weekend while reading Barron’s, but I really did have an “aha moment”. In the 20 years I’ve been investing on behalf of clients, I’ve done as much reading as I can on how to identify great investments. Most of my research has been on fundamental analysis, in the vein of Warren Buffett and Benjamin Graham – search for “value”. I’m an accountant by training, so I really enjoy looking at financial statements and finding bargains and great values.
The downside to fundamental, financial statement analysis is that I’ve often disregarded great up and coming companies over the past 20 years. Facebook, Amazon, Tesla, Google, Netflix, etc. I have always thought it crazy that investors are willing to pay 200 times the same dollar of earnings that I can get with Ford or Chevron for 10 times. A P/E ratio above the anticipated growth rate of earnings didn’t seem like a value to me.
But I watched the stocks of Amazon, Google, Tesla, et al climb into the stratosphere over the past few years. “They don’t even pay a dividend!” “Amazon doesn’t even make a profit!” I shouted to myself. What the stodgy old accountant in me was missing was the value in these companies that can’t be expressed on the financial statements. I knew they were great companies, with great products, but I said they weren’t great stocks.
Now I get to find out why I have been wrong all these years, thanks to a new book about “The End of Accounting, and the Path Forward for Investors and Managers”. I have in my mind a few of the reasons I’ve missed out on growth stocks.
- Branding is not carried on the balance sheet as an asset unless it is purchased in an acquisition. So companies that develop a strong brand from the ground up don’t look to be the same “accounting value” as a serial acquirer. I need to adjust for that.
- In the past, most of the assets of businesses were property, plant, equipment, and inventory. Think about today’s great 21st century companies. Many of them don’t have those old-school assets. They have technology. They have networks. They have brands. They have human capital. Those items are hard to value on a balance sheet, when payroll and R&D are expensed, rather than additions to company assets.
I’ve put the book on my wish list at Amazon, and I’m looking forward to calculating quantitatively the value of Research and Development spending, as well as brand value.
Think about Donald Trump. When he boasted of a net worth of $10 billion, many people scoffed. His real estate holdings aren’t worth but $x billion.
But wait. What’s in a name? Specifically, what’s the value of the Trump name, or brand. Think about a water bottle. You’d pay more if it had a Nike swoosh on it. Same for Trump’s real estate. His brand is worth something.
These innovative authors – accounting nerds – think they’ve come up with a way to calculate the value.
This stodgy old accounting nerd is looking forward to reading it.