Nov

24

1934I have never been much of a fan of Benjamin Graham, partly because, in my 16 years of investing, investment advisers who touted their devotion to his principles (including the author of "My hero, Benjamin Graham") have all too often stated that they cannot find any stocks cheap enough to buy and are therefore bearish. Once in a blue moon, such advice has been good; the rest of the time, anybody who followed it would have missed the 1,000,000% per century return from investing in equities.

Benjamin Graham's idea that the balance sheet may be more important than the income statement in valuing a company is interesting. In this respect, however, circumstances have changed since Mr. Graham's day. In today's information-intensive economy, balance sheets often do not provide much information about the assets a company uses to generate earnings. The values of brands and intellectual property seldom appear on balance sheets. (When intellectual property appears, it is usually in the form of goodwill, based on market prices for acquisitions, a method that might trouble value purists). Intellectual property is often contained in the brains of key employees. It is hard to value and hard to depreciate. In the absence of patents, one might assume a three-year half-life of existing knowledge, but how does one estimate the value of new knowledge being created? In some cases, the value of specific knowledge instantly falls 100% when a key employee leaves.  So while proprietary assets are more important than ever in valuing a company, they are extremely difficult to properly assess; a glance at the balance sheet won't do.


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5 Comments so far

  1. Invictus on November 25, 2007 12:02 am

    I agree! And have yet to see a model that can properly account for intangible assets; probably never will.

  2. Doctor Bohica on November 25, 2007 3:07 am

    This is just a brilliant post that throughly validates Victor’s assessment of Benjamin Graham in his extraordinarily insightful “Practical Speculation” to which I refer constantly! Of course, comments that reduce Ben Graham’s status are a prerequisite for kinship here, and you probably considered that fact while conceiving to share your thoughts.

    But let us all rejoice that you have seen the light and may now be on your way to the same success Victor has enjoyed.

  3. spencer smith on November 25, 2007 10:55 am

    Yes, I understand your point of view.
    Yet it sounds to me like the analysts in 1999 when they talked about the internet ipo’s.
    I wouldn’t defenestrate Mr. Graham without keeping a little bit for old times sake.

  4. phil c. on November 28, 2007 12:57 pm

    Graham philosophy is great following big market sell offs. It’s all about more common sense. Invest in sound businesses that are likely to survive, when they are on fire sale.

    The rest of the time, this approach is outdated and useless. For 20 years or so, I was a big Graham/Buffett disciple. Although I did well, I sat with a bunch of clunkers for a very long time. Too long - while the market failed to understand the genius of my stock picks. The past few years, fortunately, I was open minded enough to turn my back on “the gospel”.

    My best and fastest returns have come from the growth machine stocks. No doubt about it. These are the stocks that will make you rich not that under appreciate crap selling at bargain prices that take half a decade to move five feet.

  5. AlfaMike on December 4, 2007 2:24 am

    I wonder if there are employees who contain negative intellectual property values, such as CEOs held in general disregard, perhaps the recently booted Zander of Motorola?

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