book value

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Warren Buffett Accounting Book: Reading Financial Statements for Value Investing (Warren Buffett's 3 Favorite Books) by Stig Brodersen, Preston Pysh

accelerated depreciation, book value, discounted cash flows, fixed income, intangible asset, low interest rates, market bubble, money market fund, principal–agent problem, profit maximization, risk tolerance, stock buybacks, time value of money

Let’s get down to business and use the calculator with an example! 1) Insert book values and find the average book value growth rate: Current Book Value ($): Old Book Value (S): # of Years between Book Values: Average Book Value change (%): As you may recall, the change in book value over time provides clues into the change in intrinsic value. That is what we are trying to determine in this step. Our starting point is what we call “current book value,” and in this generic example I have used $30. We would then go back ten years and look for the “old book value,” which in this example is $10. Our calculator generates the average annual output, which is 11.6 %.

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The financial inputs required for using the calculator are all disclosed to the public in a company’s annual report and should be easy to find on free Internet sites such as MSN Money, Yahoo Finance, Morningstar, or the company’s own website. Overview of the seven steps for using the calculator Insert book values and find the average book value growth rate Insert cash taken out of the business (or dividend) Insert the current book value Input the average percent change in book value per year (from step 1) Determine the number of years Determine the discount rate Push the calculate button Assumptions Current book value: $30 Old book value: $10 Number of years between the two book value figures: 10 Yearly dividend: $1 Discount rate: 2.5% Now, enough talk.

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If they are not, you can’t expect the book value to grow like it did in the past. Your calculations will be inaccurate and misleading. If current and forecasted earnings are consistent with past earnings, they should provide a reasonable expectation of future book value growth; for example, if the company’s current book value is $10 a share, and we expect the book value growth rate to be 7% based on historical trends, then we would use the simple time-value-of-money formula to estimate the future book value ten years from now: FBV = Future book value = ? PBV = Present book value = $10 g = Expected growth rate of book value = .07 or 7% n = Number of years into the future = 10 FBV = PBV (1+ g)n FBV = $10 (1.07) 10 FBV = $19.67 In an effort to simplify our bond market price formula for stocks, we’ll rename our variables as follows: Annual coupon = The average annual dividend expected over the next n years Therefore C = D Par value = The expected future book value Therefore M = FBV = PBV (1+ g)n Now that we have adjusted the variables, let’s substitute them into the bond equation to arrive at our intrinsic value formula.

Deep Value by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Andrei Shleifer, availability heuristic, backtesting, behavioural economics, book value, business cycle, buy and hold, Carl Icahn, corporate governance, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, financial engineering, fixed income, Henry Singleton, intangible asset, John Bogle, joint-stock company, low interest rates, margin call, passive investing, principal–agent problem, Richard Thaler, risk free rate, riskless arbitrage, Robert Shiller, Rory Sutherland, shareholder value, Sharpe ratio, South Sea Bubble, statistical model, Teledyne, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tim Cook: Apple

We always emphasize that different price-to-value ratios are just different ways to scale a stock’s price with a fundamental, to extract the information in the cross-section of stock prices about expected returns. One fundamental (book value, earnings, or cashflow) is pretty much as good as another for this job, and the average return spreads produced by different ratios are similar to and, in statistical terms, indistinguishable from one another. We like [price-to-book value] because the book value in the numerator is more stable over time than earnings or cashflow, which is important for keeping turnover down in a value portfolio. Nevertheless, there are problems in all accounting variables and book value is no exception, so supplementing [price-to-book value] with other ratios can in principal improve the information about 64 DEEP VALUE expected returns.

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Clayman attributes the difference in results to the fact that the later period was more favorable to glamour stocks than to value stocks, which is unusual. Examining the universe divided into deciles on the basis of priceto-book value alone, the more expensive, high price-to-book value decile generated an average return of 14.3 percent, outperforming the cheaper, low price-to-book value decile, which generated an average return of 12.6 percent annually. She also notes that, “. . . even though the average price-to-book ratio of the good companies fell between the two periods, the faster growth of equity (book value) meant that price performance was not impaired,” which, too, is unusual.57 It’s worth noting that the outperformance occurred during a period where glamour outperformed value, which does occur periodically, but not consistently or over the long term, and also that the outperformance relied on book value growing faster than the rate at which the price-to-book value ratio fell, which is an unusual and risky assumption.

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She also notes that, “. . . even though the average price-to-book ratio of the good companies fell between the two periods, the faster growth of equity (book value) meant that price performance was not impaired,” which, too, is unusual.57 It’s worth noting that the outperformance occurred during a period where glamour outperformed value, which does occur periodically, but not consistently or over the long term, and also that the outperformance relied on book value growing faster than the rate at which the price-to-book value ratio fell, which is an unusual and risky assumption. The more conventional position would be to assume value would continue to outperform glamour, and book value would not grow faster than the priceto-book value ratio falls. The first paper fit into existing microeconomic theory, where the second paper did not, suggesting that the first paper was more likely describing the phenomenon correctly and the second was an outlier. 137 Catch a Falling Knife $1,610,000 S&P 500 TR Unexcellent Portfolios Excellent Portfolios $1,410,000 $1,210,000 $1,010,000 $810,000 $610,000 $410,000 $210,000 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 $10,000 FIGURE 7.1â•… Comparison of Unexcellent and Excellent Stock Portfolios (1972 to 2013) Source: Stifel Financial Corp. and Eyquem Investment Management LLC.

Value Investing: From Graham to Buffett and Beyond by Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, Michael van Biema

Andrei Shleifer, barriers to entry, Berlin Wall, book value, business cycle, business logic, capital asset pricing model, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, Fairchild Semiconductor, financial engineering, fixed income, index fund, intangible asset, junk bonds, Long Term Capital Management, naked short selling, new economy, place-making, price mechanism, quantitative trading / quantitative finance, Richard Thaler, risk free rate, search costs, shareholder value, short selling, Silicon Valley, stocks for the long run, Telecommunications Act of 1996, time value of money, tulip mania, Y2K, zero-sum game

The second valuation based on assets is to compare the price of the company's shares to the book value per share. The book value is the balance sheet entry for shareholder equity divided by the number of shares. Since equity by definition equals all the assets minus all the liabilities, book value can include the value of intangible assets such as goodwill and a number of other assets that may be worth considerably less than the balance sheet suggests. Buying stocks at a substantial discount to book value has been, as we have said, a successful investment strategy. No adjustment is made to the figures on the financial statement, which makes the strategy appropriate for investors who don't want to do a lot of work.

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The supervisory bodies who were responsible for seeing that the conversions went smoothly also had an interest in making sure that all the newly offered shares would sell, so they also opted for a low price. As a result, a savings and loan with a book value of $50 per share could be bought at $25 or $30. With new equity from the sale, the thrift was now overcapitalized. The conservative managers were not interested in making risky loans. As a result, not long after they went public, many thrifts started to buy back their shares. Because they were still selling at below book value, each share the bank retired increased the book value of the shares still outstanding. This was pure financial engineering; the book value rose not because of retained earnings but simply through the repurchase of stock at a discount.

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No adjustment is made to the figures on the financial statement, which makes the strategy appropriate for investors who don't want to do a lot of work. Again, few successful businesses will be available for sale at book value, and even fewer at a discount sufficient to provide the margin of safety that the value investor seeks. Just to be certain, Table 7.2 presents the book value and market value figures for Intel over five-year intervals starting in 1975. A graph of the market to book ratio over the entire period, as shown in Figure 7.2, makes the relationship more apparent. For the years between 1980 and 1995, Intel traded at between two and four times the book value of its equity. These are all end-of-year numbers. During each year, Intel stock prices hit highs and lows that differed, sometimes significantly, from the price at year-end.

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray, Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, beat the dealer, Black Swan, book value, business cycle, butter production in bangladesh, buy and hold, capital asset pricing model, Checklist Manifesto, cognitive bias, compound rate of return, corporate governance, correlation coefficient, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, Edward Thorp, Eugene Fama: efficient market hypothesis, financial engineering, forensic accounting, Henry Singleton, hindsight bias, intangible asset, Jim Simons, Louis Bachelier, p-value, passive investing, performance metric, quantitative hedge fund, random walk, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical model, stock buybacks, survivorship bias, systematic trading, Teledyne, The Myth of the Rational Market, time value of money, transaction costs

They use the following inputs: NIMTA = weighted average (quarter's net income / MTA) MTA = market value of total assets = book value of liabilities + market cap TLMTA = total liabilities / MTA CASHMTA = cash and equivalents/ / MTA EXRET = weighted average (log(1 + stock's return) − log(1 + S&P 500 return) SIGMA = annualized stock's standard deviation over the previous 3 months RSIZE = log(stock market cap / S&P 500 total market value) MB = MTA / adjusted book value, where adjusted book value = book value + .1× (market cap-book value)PRICE = log(recent stock price), capped at $15, so a stock with a stock price of $20, would be given a value of log(15) instead of log(20) The authors use a statistical technique called “logistic regression,” sometimes called a “logit model.”

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Identify Stocks at High Risk of Financial Distress 2.1 Probability of Financial Distress (PFD) Calculate PFA variables: NIMTAAVG = weighted average (quarter's net income/MTA) MTA = market value of total assets = book value of liabilities + market cap TLMTA = total liabilities / MTA CASHMTA = cash & equivalents / MTA EXRETAVG = weighted average(log(1 + stock's return) − log(1 + S&P 500 TR return) SIGMA = annualized stock's standard deviation over the previous 3 months (daily) RSIZE = log (stock market cap / S&P 500 TR total market value) MB = MTA / adjusted book value Adjusted book value = book value +.1 × (market cap-book value) PRICE = log (recent stock price), capped at $15, so a stock with a stock price of $20, would be given a value of log(15) instead of log(20).

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He chose total assets because gross profitability is independent of the capital structure adopted by management (interest payments and dividends are accounted for further down the income statement). If the numerator is independent of the capital structure, it makes sense that the denominator should also be independent of the capital structure. Book value is not appropriate here because it's affected by the stock's capital structure (book value equals assets minus liabilities. If we hold assets constant, and increase the liabilities, we reduce book value). Total assets tells us the value of all the assets owned by the firm, and it is not affected by the manner in which they are financed. For this reason, it fits logically with gross profitability.

Corporate Finance: Theory and Practice by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann le Fur, Antonio Salvi

"Friedman doctrine" OR "shareholder theory", accelerated depreciation, accounting loophole / creative accounting, active measures, activist fund / activist shareholder / activist investor, AOL-Time Warner, ASML, asset light, bank run, barriers to entry, Basel III, Bear Stearns, Benoit Mandelbrot, bitcoin, Black Swan, Black-Scholes formula, blockchain, book value, business climate, business cycle, buy and hold, buy low sell high, capital asset pricing model, carried interest, collective bargaining, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, delta neutral, dematerialisation, discounted cash flows, discrete time, disintermediation, diversification, diversified portfolio, Dutch auction, electricity market, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, German hyperinflation, Glass-Steagall Act, high net worth, impact investing, implied volatility, information asymmetry, intangible asset, interest rate swap, Internet of things, inventory management, invisible hand, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, lateral thinking, London Interbank Offered Rate, low interest rates, mandelbrot fractal, margin call, means of production, money market fund, moral hazard, Myron Scholes, new economy, New Journalism, Northern Rock, performance metric, Potemkin village, quantitative trading / quantitative finance, random walk, Right to Buy, risk free rate, risk/return, shareholder value, short selling, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stocks for the long run, supply-chain management, survivorship bias, The Myth of the Rational Market, time value of money, too big to fail, transaction costs, value at risk, vertical integration, volatility arbitrage, volatility smile, yield curve, zero-coupon bond, zero-sum game

(d) Price to book ratio (PBR) The PBR (price to book ratio) measures the ratio between market value and book value: The PBR can be calculated either on a per share basis or for an entire company. Either way, the result is the same. It may seem surprising to compare book value to market value, which, as we have seen, results from a company’s future cash flow. Even in the event of liquidation, equity value can be below book value (due, for example, to restructuring costs, accounting issues, etc.). There is no direct link between book value and market value. However, there is an economic link between book value and market value, as long as book value correctly reflects the market value of assets and liabilities.

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The value created is thus equal to the difference between the capital employed and its book value. Book value is the amount of funds invested in the company’s operations. Creation of value = enterprise value − book value of capital employed. The creation of value reflects investors’ expectations. Typically, this means that, over a certain period, the company will enjoy a rent with a present value allowing its capital employed to be worth more than its book value! The same principle applies to choosing a source of financing for allocating resources. To do so, one must disregard the book value and determine instead the value of the financial security issued and deduct the required rate of return.

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However, it should be assessed on the basis of consolidated net attributable profit – the only meaningful figure, as in most cases the parent company is merely a holding company. ArcelorMittal’s payout ratio is 0%. 6. Equity value (book value or net asset value) per share Equity value (book value or net asset value) per share is the accounting estimate of the value of a share. While book value may appear to be directly comparable to equity value, it is determined on an entirely different basis – it is the result of strategies undertaken up to the date of the analysis and corresponds to the amount invested by the shareholders in the company (i.e. new shares issued and retained earnings). Book value may or may not be restated. This is generally done only for financial institutions and holding companies. 7.

The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Feng Gu

active measures, Affordable Care Act / Obamacare, Alan Greenspan, barriers to entry, book value, business cycle, business process, buy and hold, carbon tax, Claude Shannon: information theory, Clayton Christensen, commoditize, conceptual framework, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, disruptive innovation, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial engineering, financial innovation, fixed income, geopolitical risk, hydraulic fracturing, index fund, information asymmetry, intangible asset, inventory management, Joseph Schumpeter, junk bonds, Kenneth Arrow, knowledge economy, moral hazard, new economy, obamacare, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, race to the bottom, risk/return, Robert Shiller, Salesforce, shareholder value, Steve Jobs, tacit knowledge, The Great Moderation, value at risk

It’s clear from the figures that the two patterns are similar: relative stability from the 1950s to the early 1980s, at a range of 80 to Adjusted R 2 of regression of corporate market value on reported earnings, 1950–2013 100% Percentage R 2 90% 80% 70% 60% 50% 40% 0% 1950 55 60 65 70 75 80 85 Year 90 95 2000 05 FIGURE 3.2 Share of Corporate Market Value Attributed to Earnings 10 2013 35 The Widening Chasm between Financial Information and Stock Prices Adjusted R 2 from the regression of corporate market value on reported book value, 1950–2013 100% Percentage R 2 90% 80% 70% 60% 50% 40% 0% 1950 55 60 65 70 75 80 85 90 95 2000 05 10 2013 Year FIGURE 3.3 Share of Corporate Market Value Attributed to Book Value 90 percent for earnings and 70 to 80 percent for book values, and a quick deterioration thereafter. Thus, the causes affecting the deterioration in the relevance of financial information (to be discussed in the concluding section) similarly affect both earnings and book values. Come to think of it, this is not totally surprising: By the structure of accounting procedures, what affects the income statement also affects the balance sheet, and vice versa.

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The search for additional cholesterol determinants, like food intake or parents’ cholesterol level, should go on. Now you are a statistical maven and appreciate our empirical finding: The role that earnings and book values—the key financial indicators—play in securities valuation dropped by almost 50 percent during the past half century. WHO’S THE CULPRIT—EARNINGS OR BOOK VALUES? Figure 3.1 reflects the joint relevance-loss of earnings and book values. Since accounting standard setters sometimes change their emphasis from the balance sheet to the income statement (focusing on income measurement as the primary objective of accounting) and vice versa (emphasizing the valuation of assets and liabilities over earnings), it’s instructive to examine separately the change over time in the relevance of earnings, the all-important “bottom line” of the income statement, and that of the book value, reflecting the balance sheet information concerning the company’s assets and liabilities.

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APPENDIX 3.1 We obtained the yearly adjusted R2 s shown in Figure 3.1 from the annual cross-sectional regressions of sample firms’ market value (MV) on their recently reported net income (NI), book value of equity (BV), and the number of shares outstanding (NSH).9 The regression model is as follows: MVit = a1t + a2t NIit + a3t BVit + a4t NSHit + eit , where i and t are firm and year subscripts, respectively. To ensure that market value reflects all the recent information on earnings and book value, we use market value as of three months after the firm’s fiscal year-end to which earnings and book value pertain.10 Similarly, the yearly adjusted R2 s shown in Figures 3.2 and 3.3 are obtained from the annual regressions of sample firms’ market value on their accounting earnings (book value) and the number of shares outstanding.

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

Albert Einstein, asset allocation, asset-backed security, book value, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, fear index, financial engineering, fixed income, Glass-Steagall Act, implied volatility, index fund, intangible asset, interest rate swap, inventory management, inverted yield curve, junk bonds, London Interbank Offered Rate, low interest rates, margin call, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk free rate, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, short squeeze, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

Related Terms: • Discounted Cash Flow—DCF • Net Present Value—NPV • Time Value of Money • Internal Rate of Return—IRR • Present Value—PV The Investopedia Guide to Wall Speak 229 Price to Tangible Book Value (PTBV) What Does Price to Tangible Book Value (PTBV) Mean? A valuation ratio that expresses the price of a security compared with its hard, or tangible, book value as reported in the company’s balance sheet. The tangible book value number is equal to the company’s total book value minus the value of any intangible assets. Intangible assets are usually assets such as patents, Share Price intellectual property, and goodwill. PTBV = Tangible Book Value per Share The ratio is calculated as shown here: Investopedia explains Price to Tangible Book Value (PTBV) In theory, a stock’s tangible book value per share represents the amount of money an investor would receive for each share if the company went out of business and liquidated all of its assets at book value.

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The Investopedia Guide to Wall Speak 27 Related Terms: • Credit Rating • Interest Rate • Junk Bond • High-Yield Bond • Investment Grade Book Value What Does Book Value Mean? (1) The value at which an asset is carried on a balance sheet; in other words, the cost of an asset minus accumulated depreciation. (2) The net asset value of a company, calculated as total assets minus intangible assets (patents, goodwill) and liabilities. (3) The initial outlay for an investment. This number may be net or gross of expenses such as trading costs, sales taxes, and service charges. In the United Kingdom book value is called net asset value. Investopedia explains Book Value Book value is the accounting value of a firm.

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PTBV = Tangible Book Value per Share The ratio is calculated as shown here: Investopedia explains Price to Tangible Book Value (PTBV) In theory, a stock’s tangible book value per share represents the amount of money an investor would receive for each share if the company went out of business and liquidated all of its assets at book value. As a rule of thumb, stocks that trade at higher price to tangible book value ratios have the potential to leave investors with greater share price losses compared with those which trade at lower ratios, since the tangible book value per share can be viewed as about the lowest price a stock realistically could be expected to trade at. Related Terms: • Book Value • Net Tangible Assets • Price-to-Book Ratio—P/B Ratio • Intangible Asset • Tangible Asset Price-Weighted Index What Does Price-Weighted Index Mean?

The Intelligent Investor (Collins Business Essentials) by Benjamin Graham, Jason Zweig

3Com Palm IPO, accounting loophole / creative accounting, air freight, Alan Greenspan, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate governance, corporate raider, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, George Santayana, hiring and firing, index fund, intangible asset, Isaac Newton, John Bogle, junk bonds, Long Term Capital Management, low interest rates, market bubble, merger arbitrage, Michael Milken, money market fund, new economy, passive investing, price stability, Ralph Waldo Emerson, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, shareholder value, sharing economy, short selling, Silicon Valley, South Sea Bubble, Steve Jobs, stock buybacks, stocks for the long run, survivorship bias, the market place, the rule of 72, transaction costs, tulip mania, VA Linux, Vanguard fund, Y2K, Yogi Berra

If, as many tests show, the earnings multiplier tends to increase with profitability—i.e., as the rate of return on book value increases—then the arithmetical consequence of this feature is that value tends to increase directly as the square of the earnings, but inversely the book value. Thus in an important and very real sense tangible assets have become a drag on average market value rather than a source thereof. Take a far from extreme illustration. If Company A earns $4 a share on a $20 book value, and Company B also $4 a share on $100 book value, Company A is almost certain to sell at a higher multiplier, and hence at higher price than Company B—say $60 for Company A shares and $35 for Company B shares.

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The reason is that the successful enterprises in which he is likely to concentrate his holdings sell almost constantly at prices well above their net asset value (or book value, or “balance-sheet value”). In paying these market premiums the investor gives precious hostages to fortune, for he must depend on the stock market itself to validate his commitments.† This is a factor of prime importance in present-day investing, and it has received less attention than it deserves. The whole structure of stock-market quotations contains a built-in contradiction. The better a company’s record and prospects, the less relationship the price of its shares will have to their book value. But the greater the premium above book value, the less certain the basis of determining its intrinsic value—i.e., the more this “value” will depend on the changing moods and measurements of the stock market.

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Graham recommends a “ratio of price to assets” (or price-to-book-value ratio) of no more than 1.5. In recent years, an increasing proportion of the value of companies has come from intangible assets like franchises, brand names, and patents and trademarks. Since these factors (along with goodwill from acquisitions) are excluded from the standard definition of book value, most companies today are priced at higher price-to-book multiples than in Graham’s day. According to Morgan Stanley, 123 of the companies in the S & P 500 (or one in four) are priced below 1.5 times book value. All told, 273 companies (or 55% of the index) have price-to-book ratios of less than 2.5.

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

accelerated depreciation, activist fund / activist shareholder / activist investor, air freight, ASML, barriers to entry, Basel III, Black Monday: stock market crash in 1987, book value, BRICs, business climate, business cycle, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable:, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, currency risk, discounted cash flows, distributed generation, diversified portfolio, Dutch auction, energy security, equity premium, equity risk premium, financial engineering, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, low interest rates, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, proprietary trading, purchasing power parity, quantitative easing, risk free rate, risk/return, Robert Shiller, Savings and loan crisis, shareholder value, six sigma, sovereign wealth fund, speech recognition, stocks for the long run, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, two and twenty, value at risk, yield curve, zero-coupon bond

Capital Structure Exhibit 24.28 presents Heineken’s year-end 2013 capital structure in book values and market values. The book values are shown both excluding and including any related deferred-tax assets and liabilities. These are presented for reference only, as we used market values in estimating Heineken’s target capital structure. We estimated market values for the capital structure components as follows: r Short-term debt: Short-term debt matures within one year, so in most cases, book value approximates market value. EXHIBIT 24.28 Heineken: Capital Structure % Book value, € million Book value, net of DTAs/DTLs, € million % of total book value, net of DTAs/DTLs Short-term debt 1 Long-term debt Postretirement benefit liabilities, net of assets Other nonoperating provisions Excess cash Total debt 2,561 9,853 1,202 538 (906) 13,248 2,561 9,852 887 437 (906) 12,831 8.8 33.7 3.0 1.5 (3.1) 43.9 2,561 9,853 900 404 (906) 12,812 5.8 22.2 2.0 0.9 (2.0) 28.8 Shareholders’ equity Noncontrolling interest Total equity 15,476 954 16,430 15,476 954 16,430 52.9 3.3 56.1 28,226 3,372 31,598 63.6 7.6 71.2 Total capitalization 29,678 29,261 100.0 44,410 100.0 1 Including interest payable.

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To determine the market value of the bond, multiply 104.46 percent by the bond’s book value of $500 million (found in the UPS annual report), which equals $522.30 million. Since a bond’s price depends on its coupon rate versus its yield, not every UPS bond trades at the same price. For instance, a UPS bond maturing in 2038 recently closed at 121.96 percent of par over the same time period. Consequently, value each debt separately. If an observable market value is not readily available, value debt securities at book value (referred to as carrying value), or use discounted cash flow. In most cases, the book value reported on the balance sheet reasonably approximates the current market value.

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VALUING HYBRID SECURITIES AND NONCONTROLLING INTERESTS 331 Engine (TRACE) system.17 In December 2014, Intel’s traditional debt traded close to its book value. In contrast, the company’s convertible debt traded at a significant premium. For instance, the convertible debt due in 2035 traded at $2,117 million in December 2014 versus $946 million in book value. This difference between book and market values occurred for two reasons. First, when bonds can be settled in cash, a 2008 accounting rule requires that a portion of the bond be allocated to equity.18 Since the book value of equity is not used in DCF valuation, this can lead to a significant underestimation of value.

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, book value, break the buck, business cycle, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, George Akerlof, Glass-Steagall Act, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, junk bonds, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, Paul Volcker talking about ATMs, peer-to-peer lending, proprietary trading, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Satyajit Das, Savings and loan crisis, shareholder value, sovereign wealth fund, subprime mortgage crisis, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

This figure is significantly lower than the $184 billion in shareholder equity that JPMorgan Chase reported on its balance sheet, the so-called book value of its equity. If we use the market value figure of $126 billion instead of the book value of $184 billion for the bank’s equity, JPMorgan’s ability to absorb future losses would seem even weaker and its equity ratios even less than the 8 percent under GAAP and 4.5 percent under IFRS calculated on the basis of book values.20 What do we make of the discrepancy between the book value and the market value of JPMorgan’s equity? The book value is based on the balance sheet, which is prepared and made public by the bank; it is equal to the difference between the value of the bank’s assets and the value of its debts as assessed by the bank under the prevailing accounting rules.

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The fact that the market value is lower than the book value suggests that investors believe the book value is overly optimistic.21 This discrepancy between book values and market values is of immediate practical importance if the bank wants to raise new equity by selling shares in the market. The price at which this can be done depends on the value that stock market investors place on new shares, not on what the bank puts in its books as a book “value.” For some banks, the discrepancy between the stock market valuation of their equity and the book value of this equity reported on their balance sheets has been even greater than it is in JPMorgan’s case.

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The reported conversation between Merton Miller and the banker does not actually mention rates of return. The banker argues that equity is expensive because the banks’ stock prices are only 50 percent of their book value (the value reported on the banks’ balance sheets). Miller’s response indicates that he considers the banker’s reference to book values quite flawed. Using book values as a guide for making investment decisions is indeed another article of the bankers’ new clothes. Book values usually reflect historical valuations that are no longer relevant. Investment decisions must be made in light of current valuations. The fallacies discussed in this chapter are less obvious than the fallacy of confusing equity with reserves, but they are no less important.

Security Analysis by Benjamin Graham, David Dodd

activist fund / activist shareholder / activist investor, asset-backed security, backtesting, barriers to entry, Bear Stearns, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, fear of failure, financial engineering, financial innovation, fixed income, flag carrier, full employment, Greenspan put, index fund, intangible asset, invisible hand, Joseph Schumpeter, junk bonds, land bank, locking in a profit, Long Term Capital Management, low cost airline, low interest rates, Michael Milken, moral hazard, mortgage debt, Myron Scholes, prudent man rule, Right to Buy, risk free rate, risk-adjusted returns, risk/return, secular stagnation, shareholder value, stock buybacks, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, zero-coupon bond

So we are back to the question of what will qualify as an investment. There is a well-traveled myth that Graham and Dodd exclusively relied on a company’s book value to determine a safe threshold. While intrinsic value measures the economic potential—what an owner might hope to get out of an asset—book value is an arithmetic computation of what has been invested into it.4 But book value alone cannot be determinative. If you invested an equal sum in, say, two auto companies, one run by Toyota and the other by General Motors, the book values would be equal, but their intrinsic or economic values would be very different. Graham and Dodd did not fall into this error; they stated plainly that, in terms of forecasting the course of stock prices, book value was “almost worthless as a practical matter.”

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In dealing with the first of these functions of the balance sheet, we shall begin by presenting certain definitions. The book value of a stock is the value of the assets applicable thereto as shown in the balance sheet. It is customary to restrict this value to the tangible assets, i.e., to eliminate from the calculation such items as good-will, trade names, patents, franchises, leaseholds. The book value is also referred to as the “asset value,” and sometimes as the “tangible-asset value,” to make clear that intangibles are not included. In the case of common stocks, it is also frequently termed the “equity.” Computation of Book Value. The book value per share of a common stock is found by adding up all the tangible assets, subtracting all liabilities and stock issues ahead of the common and then dividing by the number of shares.

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(It later transpired that a substantial part of the reserve was needed to absorb a write-off of plant abandoned owing to obsolescence.) The book value of the Second Preferred stock is readily computed from the foregoing, as follows: In computing the book value of the common it would be an obvious error to deduct the Second Preferred at its nonrepresentative par value of $1. The “effective par” should be taken at not less than $100 per share, in view of the $7 dividend. Hence there are no assets available for the common stock, and its book value is nil. Current-asset Value and Cash-asset Value. In addition to the well-known concept of book value, we wish to suggest two others of similar character, viz., current-asset value and cash-asset value.

The Essays of Warren Buffett: Lessons for Corporate America by Warren E. Buffett, Lawrence A. Cunningham

book value, business logic, buy and hold, compensation consultant, compound rate of return, corporate governance, Dissolution of the Soviet Union, diversified portfolio, dividend-yielding stocks, fixed income, George Santayana, Henry Singleton, index fund, intangible asset, invisible hand, junk bonds, large denomination, low cost airline, Michael Milken, oil shock, passive investing, price stability, Ronald Reagan, stock buybacks, Tax Reform Act of 1986, Teledyne, the market place, transaction costs, Yogi Berra, zero-coupon bond

Inadequate though they are in telling the story, we give you Berkshire's book-value figures because they today serve as a rough, albeit significantly understated, tracking measure for Berkshire's intrinsic value. In other words, the percentage change in book value in any given year is likely to be reasonably close to that year's change in intrinsic value. You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education's cost as its "book value." If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.

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Buffett has applied the traditional principles as chief executive officer of Berkshire Hathaway, a company with roots in a group of textile operations begun in the early 1800s. Buffett took the helm of Berkshire in 1964, when its book value per share was $19.46 and its intrinsic value per share far lower. Today, its book value per share is around $20,000 and its intrinsic value far higher. The 5 6 CARDOZO LAW REVIEW [Vol. 19:1 growth rate in book value per share during that period is 23.8% compounded annually. Berkshire is now a holding company engaged in a variety of businesses, not including textiles. Berkshire's most important business is insurance, carried on principally through its 100% owned subsidiary, GEICO Corporation, the seventh largest auto insurer in the United States.

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That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education. Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn't get his money's worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value. An interesting accounting irony overlays a comparison of the reported financial results of our controlled companies with those of 1997] THE ESSAYS OF WARREN BUFFETT 189 the permanent minority holdings . . ..

The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments by Pat Dorsey

Airbus A320, barriers to entry, book value, business process, call centre, carbon tax, creative destruction, credit crunch, discounted cash flows, intangible asset, John Bogle, knowledge worker, late fees, low cost airline, Network effects, pets.com, price anchoring, risk tolerance, risk/return, rolodex, search costs, shareholder value, Stewart Brand

Whereas a dollar of earnings or cash flow is exactly the same from Company A to Company B, the stuff that makes up book value can vary dramatically. For an asset-intensive firm like a railroad or a manufacturing firm, book value represents the bulk of the assets that generate revenue—things like locomotives, factories, and inventory. But for a service or technology firm, for example, the revenue-generating assets are people, ideas, and processes, none of which are generally contained in book value. Moreover, many of the competitive advantages that create economic moats are typically not accounted for in book value. Take Harley-Davidson as an example, which has a P/B ratio of about 5 as of this writing, meaning that the company’s current market value is about five times the rough net worth of its factories, land, and inventory of yet-to-be-built motorcycle parts.

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That seems pretty rich, until you consider that the value of the company’s brand name is not accounted for in book value, and it’s the brand that allows Harley to earn 25 percent operating margins and a 40 percent return on equity. There is one other quirk to book value worth knowing. It can often be inflated by an accounting convention known as goodwill, which is created when one company buys another. Goodwill is the difference between the acquired company’s tangible book value and the price paid for it by the buyer, and as you can imagine, it can be a huge number for firms without a lot of physical assets. (When America Online bought Time Warner, the book value of the combined firm increased by $130 billion in goodwill.)

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You’re best off subtracting goodwill from book value—and often when you see a price-to-book ratio that seems too good to be true, it’s because a big goodwill asset is boosting book value. So, with all these pitfalls, why bother with book value? Because it is extremely useful for one sector of the market that contains a disproportionate number of companies with solid competitive advantages: financial services. The assets of a financial company are typically very liquid (think of the loans on a bank’s balance sheet), so they are very easy to value accurately, which means that the book value of a financial services company is usually a pretty decent approximation of its actual tangible value.

Schaum's Outline of Bookkeeping and Accounting, Fourth Edition (Schaum's Outlines) by Joel Lerner, Rajul Gokarn

accelerated depreciation, book value, intangible asset

The periodic charge is expressed as: Cost − scrap value = Annual Depreciation Charge Useful life (in years) For example, if the cost of a machine is $17,000, its scrap value is $2,000 and its estimated useful life is 5 years, depreciation can be calcu­ lated as follows: CHAPTER 15: Property, Plant, and Equipment: Depreciation $17,000 − $2,000 111 = $3,000 per year 5 years The entry to record the depreciation would be: Depreciation Expense, Machinery 3,000 Accumulated Depreciation, Machinery 3,000 In order to have sufficient documentation for an asset’s depreciation, a schedule should be prepared showing the asset’s cost, depreciation ex­ pense, accumulated depreciation, and most important of all, its book val­ ue. Book value is the balance of an asset’s cost less its accumulated de­ preciation to date. Book value should not be confused with market value. The book value is the difference between cost and accumulated depreciation. Market value is what the asset can actually be sold for on a given date. As an asset is used, accumulated depreciation increases and book value decreases. In the final year of the assets useful life, book value is the same as scrap value. At this point, the asset is said to be fully depre­ ciated.

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It does not recognize scrap val­ ue. Instead, the book value of the asset remaining at the end of the de­ preciation period becomes the scrap value. Under this method, the straight-line rate is doubled and applied to the declining book balance each year. Many companies prefer the double-declining balance method because of the faster write-off in the earlier years when the asset con­ tributes the most to the business and when the expenditure was actually made. The procedure is to apply a fixed rate to the declining book value of the asset each year. As the book value declines, the depreciation be­ comes smaller.

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If the purchaser will not pay par value, the corporation may issue stock at a price below par. Remember The difference between par value and the lower price is called the dis­ count. Book Value The book value per share of stock is obtained by dividing the stockhold­ ers’ equity amount by the number of shares outstanding. It thus represents the amount that would be distributed to each share of stock if the corpo­ ration were to be dissolved. Individual book values for common and preferred stock are defined by separating the stockholders’ equity amount into two parts and dividing each part by the corresponding number of shares.

Guide to business modelling by John Tennent, Graham Friend, Economist Group

book value, business cycle, correlation coefficient, discounted cash flows, double entry bookkeeping, G4S, Herman Kahn, intangible asset, iterative process, low interest rates, price elasticity of demand, purchasing power parity, RAND corporation, risk free rate, shareholder value, the market place, time value of money

To calculate the annual cost use the formula: (Purchase price–Estimated disposal proceeds)/Estimated period of ownership For the truck example this will be: ($10,000⫺$4,000)/3⫽$2,000 per year The balance sheet will show the cost of the asset, the accumulated depreciation and the net book value. The profit and loss account will record the annual cost of depreciation, as shown in Chart 12.2. 130 12. CAPITAL EXPENDITURE AND WORKING CAPITAL Chart 12.2 Depreciation of an asset Year Balance sheet Cost Accumulated depreciation Net book value 0 1 2 3 4 10,000 – 10,000 10,000 (2,000) 8,000 10,000 (4,000) 6,000 10,000 (6,000) 4,000 0 0 0 0 2,000 2,000 2,000 0 Profit and loss Depreciation At the point of sale it is unlikely that the asset will realise exactly the net book value (unless it is part of a prearranged buy-back deal).

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For example, in I15 the formula is: ⫽MIN(trucks one column to the left[H15],trucks c/fwd[I10]⫺ trucks accounted for in rows below[sum(I16:I17]) 140 12. CAPITAL EXPENDITURE AND WORKING CAPITAL This triangular data table can now be used to control the asset base. Two important uses are to calculate the asset cost total and net book value of any sales (see Chart 12.14). Chart 12.14 Evaluating asset costs and net book value on disposal Row Asset cost Net book value of sales Calculation Take the number of assets in each column and multiply it by the purchase price for the year of acquisition Identify when an asset is no longer carried forward from one column to the next. For example, the asset purchased in year 0 (row 13) is removed in year 3 (column H) as it is no longer carried forward to year 4 (column I).

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Chart 12.3 Cash flow from purchase and sale of an asset Year Cash flow 0 (10,000) 1 0 2 0 3 0 4 4,000 Reducing balance depreciation Another method of depreciation that is used by some companies is “reducing balance”, which tries to approximate the typical curved behaviour of the market value graph by taking a proportion of the previous year’s net book value. Some companies use a set percentage, such as 25%, or it can be calculated using the formula: 1⫺((Estimated disposal proceeds/Purchase price)^(1/Estimated period of ownership)) Applying this to the truck example the reducing balance rate would be: 1⫺((4000/10000)^(1/3))⫽26.3194% Chart 12.4 Reducing balance depreciation of an asset Year Balance sheet Cost Accumulated depreciation Net book value Profit and loss Depreciation 0 1 2 3 4 10,000 0 10,000 10,000 (2,632) 7,368 10,000 (4,571) 5,429 10,000 (6,000) 4,000 0 0 0 0 2,632 1,939 1,429 0 Although the cash flow will be the same as for the straight line method, the cost impact is higher in the early years.

Financial Statement Analysis: A Practitioner's Guide by Martin S. Fridson, Fernando Alvarez

Bear Stearns, book value, business cycle, corporate governance, credit crunch, discounted cash flows, diversification, Donald Trump, double entry bookkeeping, Elon Musk, financial engineering, fixed income, information trail, intangible asset, interest rate derivative, interest rate swap, junk bonds, negative equity, new economy, offshore financial centre, postindustrial economy, profit maximization, profit motive, Richard Thaler, shareholder value, speech recognition, statistical model, stock buybacks, the long tail, time value of money, transaction costs, Y2K, zero-coupon bond

Accounting Principles Board (see). bona fide profit. A reported profit that represents a genuine increase in wealth as opposed to one that exploits a flaw in the accounting system and reflects no economic gain. book value. The amount at which an asset is carried on the balance sheet. Book value consists of the asset's construction or acquisition cost, less depreciation (see) and subsequent impairment of value, if applicable. An asset's book value does not rise as a function of an increase in its market value or inflation. (See also historical cost accounting.) breakeven rate. The production volume at which contribution (see) is equivalent to fixed costs (see), resulting in a pretax profit of zero.

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It is little wonder that specialists in credit analysis, particularly those who focus on the lower end of the ratings spectrum, pay little if any attention to the classic debt ratio. A key reason for the debt ratio's limited ability to discriminate according to credit risk is that it is calculated on the basis of book value. There are great disparities between book value and market value of equity, with food processing a prime example. The companies’ earnings power and by extension their share prices largely reflect the value embedded in the brand names they own, rather than their physical assets. Notwithstanding the analytical limitations of the debt ratio, the concept underlying it has considerable merit.

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Leverage also reaches a limit because lenders will not continue advancing funds beyond a certain point as financial risk increases. This leaves only book value per share, which can rise unceasingly through additions to retained earnings, as a source of sustainable growth in earnings per share. As long as the amount of equity capital invested per share continues to rise, more income can be earned on that equity, and (as the reader can demonstrate by working through the preceding formula) earnings per share can increase. A company's book value per share will not rise at all, however, if it distributes 100 percent of its earnings in dividends to shareholders.

The Investment Checklist: The Art of In-Depth Research by Michael Shearn

accelerated depreciation, AOL-Time Warner, Asian financial crisis, barriers to entry, Bear Stearns, book value, business cycle, call centre, Carl Icahn, Clayton Christensen, collective bargaining, commoditize, compensation consultant, compound rate of return, Credit Default Swap, currency risk, do what you love, electricity market, estate planning, financial engineering, Henry Singleton, intangible asset, Jeff Bezos, Larry Ellison, London Interbank Offered Rate, margin call, Mark Zuckerberg, money market fund, Network effects, PalmPilot, pink-collar, risk tolerance, shareholder value, six sigma, Skype, Steve Jobs, stock buybacks, subscription business, supply-chain management, technology bubble, Teledyne, time value of money, transaction costs, urban planning, women in the workforce, young professional

At this price, Western Union is betting on the potential that it will be able to significantly increase Custom House’s cash flows. What is the enterprise value to book value paid for the business? If a business is paying a premium to book value for an acquisition, this is an expensive way to grow. It is easier for a business to earn a decent return on book value if it is not paying a high multiple of book at the start. For example, Target builds all of its stores denovo (i.e., from the ground up) and therefore builds stores at book value. If instead, Target were to purchase other retailers at a high multiple of book value—for example, if Target paid two times book value—then it would earn a lower return on its investment.

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Include Property, Plant, and Equipment Costs You must include the purchase of fixed assets necessary to operate the business, such as real estate, plant, and equipment. You need to determine whether to use the gross book value of these assets or the depreciated, net book value of these assets: Gross book value takes the historical or acquisition cost of assets without deducting accumulated depreciation or amortization. Net book value is the value if you remove accumulated depreciation. Because the net book value of an asset is less each year, this causes ROIC to increase each year. This results in a lower rate of return during the early stages of an investment and higher rates of return in later stages, as the asset base decreases.

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Buffett estimated that Gatorade would have increased Coke’s worldwide case sales less than 2 percent, while saddling Coke with Quakers Oat’s slow-growth food business.23 If the business can use its overvalued stock to make acquisitions, it favors the acquiring shareholders. For example, many banks have been able to create value by using their high stock prices, such as two times book value, to buy banks priced at substantial discounts to book value, such as 0.5 times book value. Key Points to Keep in Mind Understanding how and why management makes acquisitions is one of the few concrete ways for investors to reduce uncertainty in assessing a company’s chances of success. As promising as it sounds, when you hear managers utter the word synergy when they make an acquisition, you should be extremely skeptical that the cost savings or revenue increases they promise will materialize.

One Up on Wall Street by Peter Lynch

air freight, Apple's 1984 Super Bowl advert, Boeing 747, book value, buy and hold, Carl Icahn, corporate raider, cuban missile crisis, Donald Trump, fixed income, index fund, Irwin Jacobs, Isaac Newton, junk bonds, large denomination, money market fund, prediction markets, random walk, shareholder value, Silicon Valley, Teledyne, vertical integration, Y2K, Yom Kippur War, zero-sum game

As long as Ford doesn’t lose all its cash, nobody has to worry about their omitting dividends today. BOOK VALUE Book value gets a lot of attention these days—perhaps because it’s such an easy number to find. You see it reported everywhere. Popular computer programs can tell you instantly how many stocks are selling for less than the stated book value. People invest in these on the theory that if the book value is $20 a share and the stock sells for $10, they’re getting something for half price. The flaw is that the stated book value often bears little relationship to the actual worth of the company. It often understates or overstates reality by a large margin.

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Look what happened a few years ago when Warren Buffett, the savviest of investors, decided to close down the New Bedford textile plant that was one of his earliest acquisitions. Management hoped to get something out of selling the loom machinery, which had a book value of $866,000. But at a public auction, looms that were purchased for $5,000 just a few years earlier were sold for $26 each—below the cost of having them hauled away. What was worth $866,000 in book value brought in only $163,000 in actual cash. If textiles had been all there was to Buffett’s company, Berkshire Hathaway, it would have been exactly the sort of situation that attracts the attention of the book-value sleuths. “Look at this balance sheet, Harry. The looms alone are worth $5 a share, and the stock is selling for $2.

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When you buy a stock for its book value, you have to have a detailed understanding of what those values really are. At Penn Central, tunnels through mountains and useless rail cars counted as assets. MORE HIDDEN ASSETS Just as often as book value overstates true worth, it can understate true worth. This is where you get the greatest asset plays. Companies that own natural resources—such as land, timber, oil, or precious metals—carry those assets on their book at a fraction of the true value. For instance, in 1987, Handy and Harman, a manufacturer of precious metals products, had a book value of $7.83 per share, including its rather large inventories of gold, silver, and platinum.

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, currency risk, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, Glass-Steagall Act, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Minsky moment, Money creation, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uptick rule, Vanguard fund

This is another reason why the rising share of corporate profits to US GDP is not a cause for alarm. Book Value, Market Value, and Tobin’s Q The book value of a firm has often been used as a valuation yardstick. The book value is the value of a firm’s assets minus its liabilities, evaluated at historical costs. The use of aggregate book value as a measure of the overall value of a firm is severely limited because book value uses historical prices and thus ignores the effect of changing prices on the value of the assets or liabilities. If a firm purchased a plot of land for $1 million that is now worth $10 million, examining the book value will not reveal this. Over time, the historical value of assets becomes less reliable as a measure of current market value.

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Let the stock buyer, if he lays any claim to intelligence, at least be able to tell himself, first, how much he is actually paying for the business, and secondly, what he is actually getting for his money in terms of tangible resources.21 Although Fama and French found that the ratio of book to market value was a slightly better value metric than the dividend yield or P/E ratio in explaining cross-sectional returns in their 1992 research, there are conceptual problems with using book value as a value criterion. Book value does not correct for changes in the market value of assets, nor does it capitalize research and development expenditures. In fact, over the time period 1987 through 2012, our studies showed that book value underperformed either dividend yields, P/E ratios, or cash flows in explaining returns.22 Since it is likely that an increasing fraction of a firm’s worth will be captured by intellectual property, book value may become an even more imperfect indicator of firm value in the future.

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A number of academic papers, beginning with Dennis Stattman’s in 1980 and later supported by Fama and French, suggested that price/ book ratios might be even more important than price/earnings ratios in predicting future cross-sectional stock returns.20 Just as they did with P/E ratios and dividend yields, Graham and Dodd considered book value to be an important factor in determining returns: [We] suggest rather forcibly that the book value deserves at least a fleeting glance by the public before it buys or sells shares in a business undertaking. . . . Let the stock buyer, if he lays any claim to intelligence, at least be able to tell himself, first, how much he is actually paying for the business, and secondly, what he is actually getting for his money in terms of tangible resources.21 Although Fama and French found that the ratio of book to market value was a slightly better value metric than the dividend yield or P/E ratio in explaining cross-sectional returns in their 1992 research, there are conceptual problems with using book value as a value criterion.

Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accelerated depreciation, accounting loophole / creative accounting, Airbus A320, Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, Boeing 747, book value, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, capital controls, Carl Icahn, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cross-subsidies, currency risk, discounted cash flows, disintermediation, diversified portfolio, Dutch auction, equity premium, equity risk premium, eurozone crisis, fear index, financial engineering, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, James Webb Space Telescope, junk bonds, Kenneth Rogoff, Larry Ellison, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, PalmPilot, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk free rate, risk tolerance, risk/return, Robert Shiller, Scaled Composites, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, Skype, SpaceShipOne, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, systematic bias, Tax Reform Act of 1986, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, vertical integration, yield curve, zero-coupon bond, zero-sum game, Zipcar

Each year KPMG, one of America’s largest accounting firms, gives its opinion that GE’s financial statements present fairly in all material respects the company’s financial position, in conformity with U.S. generally accepted accounting principles (commonly called GAAP). However, the book value of GE’s assets measures only their original (or “historical”) cost less an allowance for depreciation. This may not be a good guide to what those assets are worth today. One can go on and on about the deficiencies of book value as a measure of market value. Book values are historical costs that do not incorporate inflation. (Countries with high or volatile inflation often require inflation-adjusted book values, however.) Book values usually exclude intangible assets such as trademarks and patents. Also accountants simply add up the book values of individual assets, and thus do not capture going-concern value.

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Going-concern value is created when a collection of assets is organized into a healthy operating business. Book values can nevertheless be a useful benchmark. If a financial analyst says, “Holstein Oil sells for two times book value,” she is effectively saying that Holstein has doubled its shareholders’ past investments in the company. Book values may also be useful clues about liquidation value. Liquidation value is what investors get when a failed company is shut down and its assets are sold off. Book values of “hard” assets like land, buildings, vehicles, and machinery can indicate possible liquidation values.

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Below this we show what happens to the balance sheet when the two firms merge. We assume that B Corporation has been purchased for $18 million, 180% of book value. TABLE 31.3 Accounting for the merger of A Corporation and B Corporation assuming that A Corporation pays $18 million for B Corporation (figures in $ millions). Key: NWC = net working capital; FA = net book value of fixed assets; D = debt; E = book value of equity. Why did A Corporation pay an $8 million premium over B’s book value? There are two possible reasons. First, the true values of B’s tangible assets—its working capital, plant, and equipment—may be greater than $10 million.

Concentrated Investing by Allen C. Benello

activist fund / activist shareholder / activist investor, asset allocation, barriers to entry, beat the dealer, Benoit Mandelbrot, Bob Noyce, Boeing 747, book value, business cycle, buy and hold, carried interest, Claude Shannon: information theory, corporate governance, corporate raider, delta neutral, discounted cash flows, diversification, diversified portfolio, Dutch auction, Edward Thorp, family office, fixed income, Henry Singleton, high net worth, index fund, John Bogle, John von Neumann, junk bonds, Louis Bachelier, margin call, merger arbitrage, Paul Samuelson, performance metric, prudent man rule, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, survivorship bias, technology bubble, Teledyne, transaction costs, zero-sum game

We then create four portfolios of increasing concentration. The “Cheapest Half” contains the half of stocks in the Market portfolio with the lowest price-to-book value, or 1,959 stocks as of September 2014. The “Cheapest Third” contains the third with the lowest price-to-book value, or 1,105 stocks; the “Cheapest Fifth” contains the 20 percent of stocks with the lowest price-to-book value, 749 stocks, and the “Cheapest Tenth” contains the 10 percent of stocks with the lowest price-to-book value, or 407 stocks, all as of September 2014. The portfolios are rebalanced annually, and we track the performance from July 1, 1929, through to September 30, 2014.

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What happens if we rank stocks by undervaluation and then examine the performance of increasingly concentrated portfolios containing increasingly undervalued stocks? While the investors in this book favor free cash flowbased metrics, one very rough proxy for undervaluation is the extent to which a stock’s market price is discounted from its book value. The metric for considering this is known as price-to-book value. All else being equal, the lower the price-to-book value, the cheaper the stock, and vice versa. Using data collated by Kenneth R. French, the Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College, we can examine a universe of stock portfolios ranked on price-tobook value.

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I believe indeed the success of industry is that you always think long term, so even if incidents like mergers or takeovers cause you to be out in the shorter term, you take the long-term decision as if you were to be the owner forever, that is healthy for the industry, and therefore also for its shareholders. I think that has been the success of our operation. Table 6.1 shows the remarkable growth in Siem Industries’ book value per share since 1990. Table 6.1â•… Growth in Siem Industries Book Value Per Share (1990 to 2014) Shareholder’s Year Equity Shares Outstanding* Book Value/Share Jun 30, 1987 $5,274 16,240,000 $0.32 Jun 30, 1988 $2,975 17,573,332 $0.17 Jun 30, 1989 $17,214 17,573,332 $0.98 Jun 30, 1990 $36,271 23,301,788 $1.56 Jun 30, 1991 $50,542 25,751,788 $1.96 Jun 30, 1992 $49,778 24,647,312 $2.02 Jun 30, 1993 $80,375 24,464,112 $3.29 Jun 30, 1994 $93,513 24,424,112 $3.83 Dec 31, 1995 $125,236 25,185,424 $4.97 Dec 31, 1996 $193,447 19,524,624 $9.91 Dec 31, 1997 $291,016 19,524,624 $14.91 Dec 31, 1998 $189,463 19,066,907 $9.94 Dec 31, 1999 $308,207 17,354,657 $17.76 Dec 31, 2000 $306,561 17,002,244 $18.03 Dec 31, 2001 $259,875 16,996,644 $15.29 Dec 31, 2002 $289,834 16,796,644 $17.26 Dec 31, 2003 $307,850 16,794,144 $18.33 Dec 31, 2004 $426,490 16,793,744 $25.40 Dec 31, 2005 $451,042 15,052,492 $29.96 Dec 31, 2006 $560,935 15,052,492 $37.27 Dec 31, 2007 $883,623 15,529,927 $56.90 Dec 31, 2008 $1,028,467 15,379,927 $66.87 Dec 31, 2009 $1,158,613 15,379,927 $75.33 Dec 31, 2010 $1,304,984 15,359,927 $84.96 Dec 31, 2011 $1,823,855 15,289,927 $119.28 Dec 31, 2012 $2,086,610 15,289,927 $136.47 Dec 31, 2013 $2,227,606 15,139,681 $147.14 Dec 31, 2014 $2,053,537 15,139,681 $135.64 Compounded Annual Gain in Book Value/Share—1987–2014 Adjusted for 4-1 split * 156 25.6% Kristian Siem: The Industrialist 157 Notes 1.

The Finance Book: Understand the Numbers Even if You're Not a Finance Professional by Stuart Warner, Si Hussain

AOL-Time Warner, book value, business intelligence, business process, cloud computing, conceptual framework, corporate governance, Costa Concordia, credit crunch, currency risk, discounted cash flows, double entry bookkeeping, forward guidance, intangible asset, Kickstarter, low interest rates, market bubble, Northern Rock, peer-to-peer lending, price discrimination, Ralph Waldo Emerson, shareholder value, supply-chain management, time value of money

Nice to know Fair value Goodwill is calculated as the difference between the fair value of what is paid for the purchase and the fair value of net assets acquired. Fair value should not be confused with book value. The fair value of assets often bears little relationship to the book value if businesses choose to record their fixed assets at their original purchase (historic) cost rather than revalue (see Chapter 17 Revaluation). Over time fixed assets (in particular land and buildings) are likely to increase in value leading to a growing divide between fair values and book values. A revaluation of fixed assets to fair value is therefore typically required to calculate goodwill. Other intangibles Intangible assets are fixed assets that have no physical form and include development costs, patents, trademarks and software.

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For shop assets a discounted cashflow is calculated for each shop using historic cashflows including attributable overheads, a zero per cent growth rate, the Group’s cost of capital of ten per cent and an appropriate assumption regarding the remaining lease term. The net book value of the relevant assets attributable to the shop is impaired to the extent that the net present value of the cashflows is lower than the net book value. Supply chain assets are impaired to their estimated net realisable value. Included within disposals for the prior year were fixtures and fittings with a net book value of £849,000 which related to the closure of the in-store bakeries. The loss on disposal of these assets was £664,000 and formed part of the exceptional charge detailed in Note 4.

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Depreciation is important as it directly affects accounting profits (it is an expense which reduces profit) as well as the value of assets in the balance sheet. Companies have a choice over their depreciation policies (see Chapter 19 Accounting and financial reporting standards). While these policies must be reasonable and consistent, they allow an element of discretion which directly affects financial results. Net book value In a balance sheet TFA are stated at NBV (net book value). NBV is the cost of TFA less accumulated depreciation (cumulative depreciation expense over time). For example, ABC Ltd’s NBV is calculated as follows: £ TFA cost 100,000 Accumulated depreciation (30,000) NBV 70,000 It is important not to confuse NBV with market value, which is determined by external economic factors.

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

activist fund / activist shareholder / activist investor, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Black-Scholes formula, book value, Brownian motion, business cycle, buy and hold, buy low sell high, buy the rumour, sell the news, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, currency risk, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, global macro, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, junk bonds, late capitalism, law of one price, Long Term Capital Management, low interest rates, managed futures, margin call, market clearing, market design, market friction, Market Wizards by Jack D. Schwager, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, Phillips curve, price discovery process, price stability, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, short squeeze, SoftBank, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, systematic trading, tail risk, technology bubble, time dilation, time value of money, total factor productivity, transaction costs, two and twenty, value at risk, Vanguard fund, yield curve, zero-coupon bond

To formally link earnings and dividends, we define the earnings as the net income, NIt, and also keep track of the stock’s book value, Bt. The book value is increased by the net income and reduced by capital paid out as dividends, and this key link is called the “clean surplus accounting relation”: If we solve for dividends in the clean surplus relation and plug this expression into the dividend discount model, then we get the residual income model:3 where the residual income, RI, is defined as The residual income model says that the intrinsic value of the stock is equal to the book value plus the present value of the entire stream of future residual income.

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Residual income is of course negative if the earning is negative, but residual income can also be negative with a positive earning that is smaller than the cost of capital. If the present value of all residual incomes is negative, this result corresponds to the intrinsic value being below the book value; otherwise, the intrinsic value is above the book value. In summary, the intrinsic value is the current book value plus the present value of the additional (or residual) future profits that we expect to earn—above what could be expected based on the current book equity. 6.4. OTHER APPROACHES TO EQUITY VALUATION Relative Valuation Equity investors often value stocks based on the valuation of other comparable stocks.

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Following Asness, Frazzini, and Pedersen (2013), we can classify a stock’s quality characteristics in four broad groups based on their version of Gordon’s growth model: The left-hand side is the intrinsic value of the stock divided by its book value. We divide by book value as a normalization because otherwise differences in stocks’ equity values would be mostly driven by size. The right-hand side of the equation shows the main quality characteristics, namely those that justify a higher valuation multiple. Here, profitability (or return on equity) is defined as the profits (measured as net income, gross profits, or otherwise) per unit of book value, Et(NIt+1)/Bt. Payout is defined as the fraction of the profits that are paid out to shareholders, Et(Dt+1)/Et(NIt+1).

The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham by Joe Carlen

Abraham Maslow, Albert Einstein, asset allocation, Bernie Madoff, book value, Bretton Woods, business cycle, business intelligence, discounted cash flows, Eugene Fama: efficient market hypothesis, full employment, index card, index fund, intangible asset, invisible hand, Isaac Newton, John Bogle, laissez-faire capitalism, margin call, means of production, Norman Mailer, oil shock, post-industrial society, price anchoring, price stability, reserve currency, Robert Shiller, the scientific method, Vanguard fund, young professional

Graham was similarly concerned with deciphering a company's true book value, that is, the value of all assets available (i.e., assets minus liabilities) to the security under consideration. In The Interpretation of Financial Statements, Graham and his coauthor Spencer B. Meredith illustrate the potentially dramatic difference between book value and what Graham calls net book value: If you had not deducted the intangibles and had simply divided the $1,800,000 by the 17,000 shares you would have found the book value per share to be $105.88. You will note that there is quite a difference between this book value and the net book value of $76.47 a share.66 Financial “detective” that he was, Graham was able to look beyond first appearances (stock price, stated numbers, etc.) and, with his exceptional grasp of mathematics, identify the numerical “criminals” and determine the real state of a business's earning power and financial position.

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., 219 alpha coefficient, 262 American tax law, 112 Amigues, Marie Louise “Malou,” 237, 270–79, 301 analysis and writing, quantitative, 60 Anderson, Ed, 244, 249–50 “Anglicize” names, 99 annual earnings, reported, 167 Aoki, Hideyuki, 258 arbitrage, 112 arbitrage opportunity, defined, 105 Arffa, Robert, 258 Arnott, Rob, 171 Asimov, Isaac, 65 Auerbach, Rita, 21 balance sheets, 121 balance-sheet valuation, 96 Barman, Jacob, 65–66 Baruch, Bernard, 147–50 Baruch, Herman, 148 bear market, 308 Beebower, Gilbert, 166 Benedetti, Mario, 274 “Benjamin Graham Joint Account,” 143, 183 Berkshire Hathaway, 50, 55, 123, 136, 229, 247, 261 Berle, Adolph A., 184 beta coefficient, 262 Bill Nygren/Oakmark Funds, 257 Bogle, John, 165, 256 “bond house,” 113 bonds, convertible, 112 bond selection, 47–48 “book value,” 96 book value vs. net book value, 98 Boyle, David, 218 brand, uniqueness of, 54 Brandes, Charles, 47, 83, 127, 175, 208, 244, 255, 305 Brandes Investment Partners, 47, 306 Bretton Woods conference, 217 Brinson, Gary, 166 British parliament, 21 Brown, Chester, 60–61 Buerger's disease, 186 Buffett, Howard (father of Warren), 225 Buffett, Warren Howard Graham Buffett (first son), 233 and the Internet bubble, 37, 49 and margin of safety, 35 marriage to Susan “Susie,” 233 as most successful investor in human history, 200 as opportunistic investor, 172 “Oracle of Omaha” (nickname), 37 personal wealth estimate, 167 photographic memory of, 227 Buffett Partnership, Ltd., 247 bull markets, 175 business cycle, normal, 127 business valuations, 130 Calandro, Joseph, 315 call options, 112 charge-offs, special, 97 Charles Royce/Royce Funds, 257 Chartered Financial Analyst (CFA), 196, 291 Chatman, Seymour, 58, 106, 270 Chernow, Ron, 145 chief rabbi of Warsaw, 18–19 Chris Davis/Davis Funds, 257 Churchill, Winston, 150 “circulars” (research reports), 111 Clinton, W.

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Regarding Mattel, a comparative view of its earnings per share (EPS) in 2010 relative to its 2000 EPS indicates earnings growth of 161 percent29—several times the required 33.33 percent minimum. Moderate Ratio of Price to Assets: The market price for the stock under consideration should not exceed the net book value figure (representing the issuing company's total tangible assets minus its total liabilities) per share by more than 50 percent. Mattel's stock price is $27.83,30 and its book value per share is $7.71.31 Therefore, its price to assets ratio is 3.61–80 percent higher than the maximum of 2.0 stipulated by Graham. Moderate Ratio of Price to Earnings: The price to earnings (P/E) ratio should not exceed 15.

Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

addicted to oil, Alan Greenspan, asset allocation, backtesting, behavioural economics, Black-Scholes formula, book value, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Money creation, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stock buybacks, stocks for the long run, subprime mortgage crisis, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, uptick rule, Vanguard fund, vertical integration

CHAPTER 7 Stocks: Sources and Measures of Market Value 117 Book Value, Market Value, and Tobin’s Q The book value of a firm has often been used as a valuation yardstick. The book value is the value of a firm’s assets minus its liabilities, evaluated at historical costs. The use of aggregate book value as a measure of the overall value of a firm is severely limited because book value uses historical prices and thus ignores the effect of changing prices on the value of the assets or liabilities. If a firm purchased a plot of land for $1 million that is now worth $10 million, examining the book value will not reveal this. Over time, the historical value of assets becomes less reliable as a measure of current market value.

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Let the stock buyer, if he lays any claim to intelligence, at least be able to tell himself, first, how much he is actually paying for the business, and secondly, what he is actually getting for his money in terms of tangible resources.21 Although Fama and French found that the ratio of book to market value was a slightly better value metric than the dividend yield or P-E ratio in explaining cross-sectional returns in their 1992 research, there are conceptual problems with using book value as a value criterion. Book value does not correct for changes in the market value of assets, nor does it capitalize research and development (R&D) expenditures. In fact, over the time period 1987 through 2006, our studies showed that book value underperformed either dividend yields, P-E ratios, or cash flows in explaining returns.22 Since it is likely that an increasing fraction of a firm’s worth will be captured by intellectual property, book value may become an even more imperfect indicator of firm value in the future.

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CHAPTER 9 Outperforming the Market FIGURE 151 9–4 P-E Ratios for the S&P 500 Index Companies, 1957 through December 2006 TABLE 9–4 Returns on the S&P 500 Stocks Sorted by P-E Ratios P-E Ratio Geometric Return Lowest Low Middle High Highest S&P 500 14.30% 13.52% 11.11% 10.04% 8.90% 11.13% Arithmetic Return 15.35% 13.52% 11.11% 10.04% 8.90% 12.39% Standard Deviation Beta Excess Return over CAPM 15.50% 15.79% 14.59% 14.95% 18.84% 16.52% 0.6347 0.6067 0.6230 0.7077 0.8546 1.0000 5.51% 4.99% 2.30% 0.70% -0.78% 0.00% 152 PART 2 Valuation, Style Investing, and Global Markets that price-to-book ratios might be even more important than price-toearnings ratios in predicting future cross-sectional stock returns.20 Like P-E ratios and dividend yields, Graham and Dodd considered book value to be an important factor in determining returns: [We] suggest rather forcibly that the book value deserves at least a fleeting glance by the public before it buys or sells shares in a business undertaking. . . . Let the stock buyer, if he lays any claim to intelligence, at least be able to tell himself, first, how much he is actually paying for the business, and secondly, what he is actually getting for his money in terms of tangible resources.21 Although Fama and French found that the ratio of book to market value was a slightly better value metric than the dividend yield or P-E ratio in explaining cross-sectional returns in their 1992 research, there are conceptual problems with using book value as a value criterion.

The Acquirer's Multiple: How the Billionaire Contrarians of Deep Value Beat the Market by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, book value, business cycle, Carl Icahn, cognitive dissonance, corporate governance, corporate raider, Jeff Bezos, Mark Spitznagel, Market Wizards by Jack D. Schwager, Paul Graham, Peter Thiel, Richard Thaler, shareholder value, stock buybacks, tail risk, Tim Cook: Apple

De Bondt and Thaler tested the idea by finding undervalued and expensive stocks and then tracking the profits. They ranked groups of stocks by price-to-book value. Book value is the value of a company’s assets (what it owns) less its liabilities (what it owes). It is one measure of a company’s value. Price-to-book value measures how much you pay for that value. If you pay less than book value, you may be getting a bargain. If you pay more than book value, you may be overpaying. De Bondt and Thaler put the stocks into five groups. We’ll call the cheapest group the undervalued stocks. They called the expensive group the expensive stocks.

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(Remember, high return on equity is what makes businesses “wonderful.”) If you only looked at asset growth and return on equity, you might expect excellent stocks to beat unexcellent stocks. But Clayman’s excellent stocks were undervalued, and the excellent stocks were expensive. Clayman’s unexcellent stocks traded at 0.6 times book value. Peters’s excellent stocks traded at 2.5 times book value. In other words, the unexcellent stocks were fair companies at wonderful prices, and the excellent stocks were wonderful companies at fair prices. Which stocks were the better investment? In 2013, Barry B. Bannister tested Clayman’s unexcellent stocks from June 1972 to June 2013.

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The profitability and asset growth trended to the average. The businesses of the unexcellent stocks also worsened but not as much as the excellent stocks. Clayman’s unexcellent stocks beat the market because the discount between price and value closed. In other words, the price-to-book values went up. The unexcellent stocks’ price-to-book value trended to the average, and the stock prices went up. The excellent stocks stayed better businesses than the unexcellent stocks. But the excellent stocks’ valuation went down, so the stock price of the excellent stocks lagged. This is mean reversion. Mean reversion means the stock prices of undervalued stocks are likely to rise over time, and the stock prices of expensive stocks fall.

The Big Secret for the Small Investor: A New Route to Long-Term Investment Success by Joel Greenblatt

backtesting, book value, discounted cash flows, diversified portfolio, hiring and firing, index fund, risk free rate, Sharpe ratio, time value of money, Vanguard fund

There are also a number of what are known as fundamentally weighted index strategies that have some definite advantages over simply equally weighting all stocks. For these strategies, instead of using market capitalization to decide how much to buy of each stock in the index, other measures of economic size are used. The size of a company can be measured by the amount of sales the company has, by earnings, by a company’s book value (essentially its assets minus its liabilities), by dividends, or by any number or combination of other measures of economic size. The idea behind these indexes is to avoid the problems that come from using market capitalization (price multiplied by shares outstanding) to determine weighting. Since a stock’s price sometimes reflects the emotions of Mr.

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Since a stock’s price sometimes reflects the emotions of Mr. Market (which cause us to invest too much in expensive stocks and too little in bargain stocks), it’s an advantage that none of these other measures of company size used in a fundamentally based index (like total sales, earnings, or book value) are affected by stock price at all. The result of creating an index weighted by attributes that reflect economic footprint rather than market cap will still tend to weight the index toward larger companies. The benefit of weighting larger companies with greater amounts of sales, earnings, etc. more heavily is that fundamentally based indexes will end up owning businesses in proportions that are much more representative of the overall market and economy than equal weighting would provide.

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As a result, an index that uses fundamental weightings to determine how much to buy of each stock will tend to place more money in companies with larger market capitalizations and less money in companies with smaller market capitalizations. This makes it much easier for fundamentally weighted indexes to effectively handle larger amounts of money than it is for equally weighted indexes. In addition, since the fundamental characteristics of a company (such as sales, earnings, and book value) don’t jump around like stock prices do, fundamental weightings don’t change all that drastically or often. So unlike equally weighted indexes that must reweight frequently along with changes in stock prices, not that much trading has to be done to keep the companies in the fundamentally weighted index at their proper weighting.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, book value, BRICs, butter production in bangladesh, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

But certainly regarding early 2009, when the stocks of major banks sold at very low prices relative to their book values, it is hard to argue that investors did not consider them in danger of going bankrupt. And even those who would argue that low-market-to-book-value stocks provide higher returns because of investor irrationality find the Fama-French risk factors useful. THE FAMA-FRENCH RISK FACTORS * * * Beta: from the Capital-Asset Pricing Model Size: measured by total equity market capitalization Value: measured by the ratio of market to book value * * * Some analysts would add further variables to the Fama-French three-factor risk model.

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The low multiples might reflect not value but a profound concern about the viability of the companies. Stocks That Sell at Low Multiples of Their Book Values Tend to Produce Higher Subsequent Returns Another predictable pattern of return is the relationship between the ratio of a stock’s price to its book value (the value of the company’s assets as recorded on its books) and its later return. Stocks that sell at low ratios of price to book value tend to produce higher future returns. This pattern appears to hold for both U.S. and many foreign stock markets, as has been shown by Fama and French.

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Behavioralists argue that such results raise questions about the efficiency of the market if one accepts beta as the appropriate measure of risk. But price-to-book-value (P/BV) ratios could reflect another risk factor that is priced into the market. Companies in some degree of financial distress are likely to sell at low prices relative to book values. For example, the big money center banks such as Citigroup and Bank of America sold at prices well below their reported book values during early 2009, when it appeared that these institutions could quite possibly go bankrupt. Fama and French argue that a three-factor risk model (including P/BV and size as well as beta as measures of risk) is the appropriate benchmark against which any supposed inefficiencies should be measured.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition) by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, book value, butter production in bangladesh, buttonwood tree, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Detroit bankruptcy, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, equity risk premium, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Salesforce, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, Teledyne, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

But certainly regarding early 2009, when the stocks of major banks sold at very low prices relative to their book values, it is hard to argue that investors did not consider them in danger of going bankrupt. And even those who would argue that low-market-to-book-value stocks provide higher returns because of investor irrationality find the Fama-French risk factors useful. THE FAMA-FRENCH RISK FACTORS • Beta: from the Capital-Asset Pricing Model • Size: measured by total equity market capitalization • Value: measured by the ratio of market to book value Some analysts would add further variables to the Fama-French three-factor risk model.

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Another predictable pattern of return is the relationship between the ratio of a stock’s price to its book value (the value of the company’s assets as recorded on its books) and its later return. Stocks that sell at low ratios of price to book value tend to produce higher future returns. This pattern appears to hold for both U.S. and many foreign stock markets, as has been shown by Fama and French, whose work was described in chapter 9. The Negatives. Never forget that low P/E multiples and low price-to-book-value (P/BV) ratios can reflect risk factors that are priced into the market. Companies in some degree of financial distress are likely to sell at low prices relative to earnings and book values.

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The factors derive from their empirical work showing that returns are related to the size of the company (as measured by the market capitalization) and to the relationship of its market price to its book value. Fama-French argue that smaller firms are relatively risky. One explanation might be that they will have more difficulty sustaining themselves during recessionary periods and thus may have more systematic risk relative to fluctuations in GDP. Fama-French also argue that stocks with low market prices relative to their book values may be in some degree of “financial distress.” These views are hotly debated, and not everyone agrees that the Fama-French factors measure risk.

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike

Albert Einstein, AOL-Time Warner, Atul Gawande, Berlin Wall, book value, Checklist Manifesto, choice architecture, Claude Shannon: information theory, collapse of Lehman Brothers, compound rate of return, corporate governance, discounted cash flows, diversified portfolio, Donald Trump, Fall of the Berlin Wall, Gordon Gekko, Henry Singleton, impact investing, intangible asset, Isaac Newton, junk bonds, Louis Pasteur, low interest rates, Mark Zuckerberg, NetJets, Norman Mailer, oil shock, pattern recognition, Ralph Waldo Emerson, Richard Feynman, shared worldview, shareholder value, six sigma, Steve Jobs, stock buybacks, Teledyne, Thomas Kuhn: the structure of scientific revolutions, value engineering, vertical integration

He focused on newfangled metrics, like EBITDA and internal rate of return (IRR), that were becoming the lingua franca of the nascent private equity industry, and he eschewed more traditional accounting measures, such as reported earnings and book value, that were Wall Street’s preferred financial metrics at the time. He had particular disdain for book value, once declaring during a rare appearance at an industry conference that “book equity has no meaning in our business,” a statement that was greeted with stunned silence by the audience, according to longtime analyst John Bierbusse. Mauboussin added, “You have to have fortitude to look past book value, EPS, and other standard accounting metrics which don’t always correlate with economic reality.”7 . . .

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A proxy for these returns can be seen in figure 2-1, which shows the approximately eightfold growth in book value at Teledyne’s insurance subsidiaries from 1975 through 1985, when Singleton began the process of dismantling his company. During the period from 1984 to 1996, Singleton shifted his focus from portfolio management to management succession (in 1986, he tapped Roberts to succeed him as CEO, retaining the chairman’s title) and to optimizing shareholder value in the face of stagnating results at Teledyne’s operating divisions. To accomplish these objectives, Singleton resorted to new tactics, again confounding Wall Street. FIGURE 2-1 Teledyne insurance book value ($ in millions)a a.

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See’s: The Turning Point A pivotal investment in Buffett’s shift in investment focus from “cigar butts” to “franchises” was the acquisition in 1972 of See’s Candies. Buffett and Munger bought See’s for $25 million. At the time, the company had $7 million in tangible book value and $4.2 million in pretax profits, so they were paying a seemingly exorbitant multiple of over three times book value (but only six times pretax income). See’s was expensive by Graham’s standards, and he would never have touched it. Buffett and Munger, however, saw a beloved brand with excellent returns on capital and untapped pricing power, and they immediately installed a new CEO, Chuck Huggins, to take advantage of this opportunity.

King Icahn: The Biography of a Renegade Capitalist by Mark Stevens

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Bear Stearns, book value, Carl Icahn, classic study, company town, corporate governance, corporate raider, Donald Trump, financial engineering, flag carrier, Gordon Gekko, Irwin Jacobs, junk bonds, laissez-faire capitalism, low interest rates, Michael Milken, old-boy network, Ponzi scheme, profit motive, shareholder value, yellow journalism

Icahn chose Tappan as an early target for two critical reasons: First, he believed that a turnaround was in the offing and the company’s stock price failed to reflect this potential. Second, Tappan’s book value of roughly $20 a share was more than two times the price of its stock. This spread between book and market value was where Icahn saw his ultimate profit. By flushing out a buyer willing to acquire the company or its assets at a price somewhere between the price Icahn paid for his shares and the book value per share, he was assured of a substantial return on his investment. As Icahn’s war-room tactician, Kingsley drafted the takeover strategies built around the Tappan raid.

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Icahn was not the only one to see that REIT purchases made for good bottom fishing. With the real estate sector apparently on the verge of a sharp recovery, buying REIT shares while their prices were still depressed promised substantial profits over a narrow time frame. Considering the significant spread between book value and stock prices, investors saw minimal downside risk. Theoretically, all they had to do was wait for the gap to close and cash in their chips. “As an expert on REITs, I was buying stock in a number of them,” said attorney Marvin Olshan. “At one point, I placed an order with Icahn & Company.

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“A research report had said that Baird & Warner was worth about $15 a share, but I told Carl that if it were liquidated, it could yield as much as $22 a share. I don’t know how much I had to do with it, but he proceeded to buy the stock and he asked me to represent him as his lawyer.” If the stock price capped at Baird & Warner’s book value of $14 a share, Icahn would earn a tidy $5.50 per share, or about 65 percent on his investment. “A REIT was like a closed-end fund in real estate,” Kingsley said. “Because the Baird & Warner REIT was undervalued, it was a natural. We were confident we could profit on it.” But Icahn had another motive.

Fred Schwed's Where Are the Customers' Yachts?: A Modern-Day Interpretation of an Investment Classic by Leo Gough

Albert Einstein, banking crisis, Bernie Madoff, book value, corporate governance, discounted cash flows, disinformation, diversification, fixed income, index fund, John Bogle, junk bonds, Long Term Capital Management, Michael Milken, Northern Rock, passive investing, Ralph Waldo Emerson, random walk, short selling, South Sea Bubble, The Nature of the Firm, the rule of 72, The Wealth of Nations by Adam Smith, transaction costs, young professional

So how do we go about doing this? One way is to look at a company’s price to book ratios. The price to book ratio is the price per share/ book value of equity per share. The book value is the total assets of the company minus its liabilities. Book value tends to be a relatively stable number, and is useful for comparisons between firms operating under similar accounting rules. Remember though, that some countries let firms state a relatively high book value, so you will have to make adjustments for this, and that some industries, such as high technology, may not have many tangible assets. DEFINING IDEA… (An investor) should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning

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If this continues in the future, the rewards of investing in such ‘bargains’ should be reasonably good. The famous value investor, Benjamin Graham, who died in the 1950s, always looked for low price/book ratios as one of the most important criteria for investment. However, his ceiling was very stringent; he was only interested in companies whose share price was less than two thirds of book value. Companies like this tend not to be growing – Graham’s attitude was that they were ‘like cigar butts with one or two good puffs left in them’. Another useful measure, this time for analysing firms that are expected to grow fast, is the price/equity to growth (PEG) ratio. This is calculated as the price earnings ratio (P/E) / the expected growth rate per share.

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When you calculate the P/E, you must make sure that it matches the earning period that you are using. A third useful ratio is the price/sales ratio. This is the market value of equity/ annual sales. Some analysts like this ratio because it removes several possible biases. For example, many companies calculate their book value and earnings per share differently, which makes them hard to compare with one another. The price/sales ratio, on the other hand, deals with ‘real’ sales figures and makes the figures easier to compare. The companies that are most likely to be undervalued on this measure are those with a low price/sales ratio and high profit margins.

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Revised and Updated by Gautam Baid

Abraham Maslow, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, Albert Einstein, Alvin Toffler, Andrei Shleifer, asset allocation, Atul Gawande, availability heuristic, backtesting, barriers to entry, beat the dealer, Benoit Mandelbrot, Bernie Madoff, bitcoin, Black Swan, book value, business process, buy and hold, Cal Newport, Cass Sunstein, Checklist Manifesto, Clayton Christensen, cognitive dissonance, collapse of Lehman Brothers, commoditize, corporate governance, correlation does not imply causation, creative destruction, cryptocurrency, Daniel Kahneman / Amos Tversky, deep learning, delayed gratification, deliberate practice, discounted cash flows, disintermediation, disruptive innovation, Dissolution of the Soviet Union, diversification, diversified portfolio, dividend-yielding stocks, do what you love, Dunning–Kruger effect, Edward Thorp, Elon Musk, equity risk premium, Everything should be made as simple as possible, fear index, financial independence, financial innovation, fixed income, follow your passion, framing effect, George Santayana, Hans Rosling, hedonic treadmill, Henry Singleton, hindsight bias, Hyman Minsky, index fund, intangible asset, invention of the wheel, invisible hand, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jeff Bezos, John Bogle, Joseph Schumpeter, junk bonds, Kaizen: continuous improvement, Kickstarter, knowledge economy, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, low interest rates, Mahatma Gandhi, mandelbrot fractal, margin call, Mark Zuckerberg, Market Wizards by Jack D. Schwager, Masayoshi Son, mental accounting, Milgram experiment, moral hazard, Nate Silver, Network effects, Nicholas Carr, offshore financial centre, oil shock, passive income, passive investing, pattern recognition, Peter Thiel, Ponzi scheme, power law, price anchoring, quantitative trading / quantitative finance, Ralph Waldo Emerson, Ray Kurzweil, Reminiscences of a Stock Operator, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, Savings and loan crisis, search costs, shareholder value, six sigma, software as a service, software is eating the world, South Sea Bubble, special economic zone, Stanford marshmallow experiment, Steve Jobs, Steven Levy, Steven Pinker, stocks for the long run, subscription business, sunk-cost fallacy, systems thinking, tail risk, Teledyne, the market place, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, time value of money, transaction costs, tulip mania, Upton Sinclair, Walter Mischel, wealth creators, Yogi Berra, zero-sum game

So, although businesses exist under the assumption of operating forever, the reality is that their stocks have uncertain maturity dates. 3. Par value. The par value of a stock is the book value of its equity. This is an accounting value that approximates the value of a business to its shareholders if it were to stop operations immediately—that is, it does not account for future growth. It is the difference between what a company owns (assets) and what that company owes to others (liabilities). Buffett has cautioned investors not to confuse book value with intrinsic value: “Of course, it’s per-share intrinsic value, not book value, that counts. Book value is an accounting term that measures the capital, including retained earnings, that has been put into a business.

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This leads to an important conclusion: when investing in short-term opportunities like commodities, cyclicals, and special situations, pay greater attention to price and mean reversion, but when investing in long-term compounders, pay maximum attention to the quality of business and management above all else. For example, buying a low-quality public sector bank in India at 30 percent to 40 percent of book value can work out well if and when the stock gets revalued to 100 percent of book value. But over ten- or fifteen-year periods or longer, paying even three times book value for a high-quality, well-managed franchise like HDFC Bank should deliver better results. (Between two lenders with similar levels of return on equity and growth, I would prefer the lender with a higher price-to-book valuation for two reasons: (1) growth capital in the future would be available at a lower equity dilution, and (2) a higher price-to-book valuation tends to signify important nondisclosed aspects like superior underwriting skills, robust internal processes, and better quality of the loan book.)

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Discount that number back from the future to arrive at fair value. Many times, conventional valuation measures based on reported earnings or accounting book values result in an optically high price-to-earnings or price-to-book ratio for a moated business, and investors end up making costly mistakes of omission because they find these businesses to be overvalued. But, as Buffett has said: Whether appropriate or not, the term “value investing” is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments.

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan

Alan Greenspan, asset-backed security, Bear Stearns, book value, call centre, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, Deng Xiaoping, diversification, Financial Instability Hypothesis, fixed income, Glass-Steagall Act, Hyman Minsky, Irwin Jacobs, Jim Simons, John Meriwether, junk bonds, Long Term Capital Management, low interest rates, margin call, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, mutually assured destruction, Myron Scholes, New Journalism, Northern Rock, proprietary trading, Renaissance Technologies, Rod Stewart played at Stephen Schwarzman birthday party, Savings and loan crisis, savings glut, shareholder value, sovereign wealth fund, stock buybacks, too big to fail, traveling salesman, uptick rule, vertical integration, Y2K, yield curve

CVRs were popular once upon a time on Wall Street as a way to cleverly bridge the valuation gap between buyers and sellers or to offer more value to sellers if certain hurdles were met, most famously in Viacom's 1993 $10 billion acquisition of Paramount Communications. But CVRs have been used infrequently since then. In proposing the use of a CVR-like security, Parr told Braunstein, the JPMorgan M&A banker, “You're fundamentally telling us you don't believe our book value. We do believe our book value, so that this should be easy to give. You don't believe it. We believe it, so we'll take a CVR. If you're right and there's nothing there, well, fine.” But JPMorgan wouldn't go for it. When Parr came back into the room to explain that Braunstein told him the offer would be $2 period, Cohen asked him if he knew why.

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Usually, the deal dynamic is such that a small percentage increase in price—say, a move to $70 a share from $65 a share, to cite the case of InBev's 2008 acquisition of Anheuser-Busch—combined with a relatively quick resolution will yield a desirable annualized return. Everyone's happy and the deal gets done. In this case, a very different dynamic quickly became apparent. Since Bear Stearns's book value was $84 per share and the offer price was $2 a share, there was a sense in the market that the potential upside on pushing to recut the deal was huge, even if the book value was discounted aggressively. The Barron's analysis helped to fuel this thinking among investors. Even if an arb bought the Bear stock at, say, $4 per share on Monday, if the deal were renegotiated to $6, the nominal return would be a whopping 50 percent and the annualized return would be even higher.

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Moszkowski wrote a report, in July 2000, explaining what Cayne had told him: that for the first time Bear Stearns would consider selling the firm if Cayne could get four times book value. Cayne “had signaled something of a change of attitude,” Moszkowski wrote in his report about the possibility of a sale of Bear Stearns, making “it quite clear that an acquisition is not out of the question.” Then Cayne added some fuel to the brushfire he had started. “The world is changing, and we recognize that a synergistic combination might be in the interest of shareholders,” he told the Wall Street Journal. But since at that time the firm's book value was around $30 per share, Cayne had essentially put a price of $120 per share on the firm, $19 billion in total, far above the $46 per share the stock had been trading at.

The Dhandho Investor: The Low-Risk Value Method to High Returns by Mohnish Pabrai

asset allocation, backtesting, beat the dealer, Black-Scholes formula, book value, business intelligence, call centre, cuban missile crisis, discounted cash flows, Edward Thorp, Exxon Valdez, fixed income, hiring and firing, index fund, inventory management, John Bogle, Mahatma Gandhi, merger arbitrage, passive investing, price mechanism, Silicon Valley, time value of money, transaction costs, two and twenty, zero-sum game

Wall Street assumed the company would have to declare bankruptcy when it defaulted on its debt and tanked the stock. At the time, Stewart had about $700 million in annual revenues and owned about 700 cemeteries and funeral homes in nine countries, with the bulk of them in the United States. Stewart’s tangible book value was $4 per share. It was thus trading at half of book value. Since book value included hard assets like land at cost, it was likely understated. Stewart’s earnings and operating cash flow for the six months ended April 30, 2000, was about $38 million, or about $0.36 per share. On an annualized basis, it was producing free cash flow of about $0.72 per share.

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It is another terrific indicator of distress. This list of 40 stocks routinely shows price drops of 20 percent to 70 percent over that period. The ones with the largest drops are likely the most distressed. It also has a summary every week of the stocks with the lowest price-to-earnings ratios (P/Es), widest discount to book value, highest dividend yield, and so on. Not all these businesses are distressed, but if a business is trading at a P/E of 3, it is worth a closer look. 3. There is a publication called Portfolio Reports (www.portfolioreports.com) that is published monthly. It lists the 10 most recent stock purchases by 80 of the top value managers.

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It is a wonderful web site started and managed by Joel Greenblatt of Gotham Capital. Greenblatt has perhaps the best audited record of any unleveraged investor on the planet over the past 20 years—a compounded annualized return of 40 percent. We delve more into Greenblatt and his Dhandho approach later in the book. Value Investors Club has about 250 members—each of whom had to get approved for membership by presenting a good investment idea. These members are required to post at least two ideas a year. The quality of these ideas is decent as they are peer rated. If a member presents shoddy ideas, he or she is likely to lose membership privileges.

Mastering Book-Keeping: A Complete Guide to the Principles and Practice of Business Accounting by Peter Marshall

accounting loophole / creative accounting, asset allocation, book value, double entry bookkeeping, information retrieval, intangible asset, the market place

Using the trial balance on page 140 we will compile a balance sheet for internal use, that also meets the requirements of the Companies Act 1985 (Format 1). Compiling a company balance sheet step by step 1. Make a heading: ‘Fixed assets’. Allocate three cash columns on the right of a sheet of paper, and head them ‘Cost’, ‘Less provision for depreciation’, and ‘Net book value’. Underneath, record the values for each fixed asset. Net book value means value after depreciation. On the left write against each the name of the asset concerned. Total up each column and cross cast (cross check). 2. Make a heading: ‘Current assets’. Enter in the second column the value of stock then write against it on the left: ‘Stock’.

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They include: . the identification/serial number . description of the asset . date of acquisition . cost . how it was financed . rate of depreciation and the method for calculating this . annual depreciation for each year of its life . current net book value . date of disposal . proceeds from disposal. The reasons why it is important to keep a fixed asset register include: . It details how the fixed asset figure on the balance sheet is made up. . The business can check the presence and condition of fixed assets against their record in the register from time to time. . It shows the current net book values, so that accurate posting can be made in the ledger at the time of disposal. . It shows whether there is any finance on the assets, which is important at the time of disposal.

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They include trade creditors, and bank overdraft. 95 A. FRAZER BALANCE SHEET as at 31 December 200X Cost Less provision for depreciation Fixed assets Premises Fixtures and fittings Motor van 40,000 15,000 8,000 63,000 Current assets Stock Debtors Less provision for doubtful debts Cash at bank Cash in hand Net book value 750 1,600 2,350 40,000 14,250 6,400 60,650 9,000 10,000 2,000 8,000 10,000 50 27,050 Current liabilities Creditors Total net assets (or working capital) 12,000 15,050 75,700 Financed by Capital as at 1 January 200X Add profit for period 63,150 19,100 82,250 6,550 75,700 Less drawings Fig. 68.

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William J. Bernstein

asset allocation, backtesting, book value, buy and hold, capital asset pricing model, commoditize, computer age, correlation coefficient, currency risk, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, index arbitrage, index fund, intangible asset, John Bogle, junk bonds, Long Term Capital Management, p-value, passive investing, prediction markets, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, South Sea Bubble, stocks for the long run, survivorship bias, the rule of 72, the scientific method, time value of money, transaction costs, Vanguard fund, Wayback Machine, Yogi Berra, zero-coupon bond

All companies have a book value; this can be thought of as the net value of a company’s total assets, although the accounting reality of this number is much more complex. It is a rough number. The book value of an airline is easily understood; it is primarily the value of its planes, buildings, and office equipment, minus its liabilities. Let’s assume ABC Airlines owns assets valued at $2 billion and liabilities of $1 billion, resulting in net assets of $1 billion; let’s further assume that the value of all of its outstanding stock is $2 billion. Its P/B ratio is 2; it is selling for twice its book value. A stock with a P/B of less than 1 is said to be Odds and Ends 113 cheap; one with a P/B of more than 5 is said to be expensive, at least relative to its book value.

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A stock with a P/B of less than 1 is said to be Odds and Ends 113 cheap; one with a P/B of more than 5 is said to be expensive, at least relative to its book value. The book value of a stock is very stable; corporate accountants usually have no need to fudge this number. Finally, there is dividend yield. This is easy to understand—it is simply the amount of dividend remitted to the shareholders divided by the price of the stock. If XYZ Multimedia, Inc. sells for $100 per share, earns $5 per share and remits $3 of this to the shareholders, then the dividend yield is 3%. It is possible for a company to pay more in dividends than its earnings, but it obviously cannot do this indefinitely.

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See capital asset pricing model. Bid price: A broker’s price to buy a stock or bond. Bond: Debt issued by a corporation or governmental entity. Carries a coupon, or the amount of interest it yields. Bonds are usually of greater than one-year maturity. (Treasury securities of 1–10 years’ maturity are called notes.) Book value: A company’s assets minus intangible assets and liabilities; very roughly speaking, a company’s net assets. Capital asset pricing model (CAPM): A theory relating risk and expected return. Basically, it states that the return of a security or portfolio is equal to the risk-free rate plus a risk premium defined by Glossary 189 its beta.

Triumph of the Optimists: 101 Years of Global Investment Returns by Elroy Dimson, Paul Marsh, Mike Staunton

asset allocation, banking crisis, Berlin Wall, Black Monday: stock market crash in 1987, book value, Bretton Woods, British Empire, buy and hold, capital asset pricing model, capital controls, central bank independence, classic study, colonial rule, corporate governance, correlation coefficient, cuban missile crisis, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, European colonialism, fixed income, floating exchange rates, German hyperinflation, index fund, information asymmetry, joint-stock company, junk bonds, negative equity, new economy, oil shock, passive investing, purchasing power parity, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, stocks for the long run, survivorship bias, Tax Reform Act of 1986, technology bubble, transaction costs, yield curve

In particular, we examine the returns from investing in stocks whose price is low relative to recent dividends, earnings, or book value. Since the earliest days of security analysis, experts stressed the potential benefits of buying at a price that is reasonable relative to fundamentals. The oldest yardstick is probably the price-to-dividend ratio, or its reciprocal, the dividend yield. But long ago, Graham and Dodd (1934) also urged investors to look for “a reasonable ratio of market price to average earnings,” and further advised that “the book value deserves at least a fleeting glance by the public before it buys or sells shares.” Stocks that trade at a high dividend yield (a low price-todividend ratio), or a high earnings yield (a low price-to-earnings ratio), or a high ratio of the book value of equity to the market value of equity, are often referred to as value stocks.

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However, persistent poor performance can lead to dividends, earnings, or book values that decline to zero or even (in the latter two cases) become negative. Companies that pay a dividend of zero, for example, can be more similar in their attributes to high yielding value stocks than to low yielding growth stocks; zero-yielders are also more similar to value stocks in terms of their subsequent stock market performance. To simplify computation of value-growth premia, it is common to focus on companies whose dividends, earnings, or book values are all positive before entering an index of value or growth stocks.

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Figure 10-3: Annual value-growth return premia based on entire UK market, 1956–2000 50 Value-growth return premium (% per year) 40 30 20 10 0 -10 High-low book-to-market High-low dividend yield -20 -30 1955 1960 Source: Stefan Nagel 1965 1970 1975 1980 1985 1990 1995 2000 Chapter 10 Stock returns: value versus growth 143 To produce Figure 10-3, we form mid-year portfolios, based on the ratio of the end-June share price to the book value of equity from the end of the preceding December (we omit companies with a non-positive book value). We rank stocks by their book-to-market: the highest 40 percent of companies are designated “value” stocks, while the lowest 40 percent are “growth” stocks. Performance is monitored over the following twelve months, by measuring the return premium of value relative to growth stocks.

Greed and Glory on Wall Street: The Fall of the House of Lehman by Ken Auletta

Bear Stearns, book value, business climate, classic study, corporate governance, financial independence, fixed income, floating exchange rates, Herman Kahn, interest rate swap, junk bonds, New Journalism, profit motive, proprietary trading, Ronald Reagan, Saturday Night Live, scientific management, traveling salesman, zero-coupon bond

Accepting Peter Cohen’s roughly $118 million figure for Lehman’s official net worth, this means that from March 31 to May 11 Lehman’s book value plummeted by $27 million, which represents a pre-tax loss of about $54 million—$74 million if one strictly follows the bookkeepers. To gauge the enormity of these losses using Cohen’s best-case calculations, consider: Lehman’s pre-tax profits fell from about $110 million between October 1982 and May 1983 to pre-tax losses of about $54 million in a comparable period a year later—a negative swing of about $164 million. Coupled with the exodus of partners, it means that in the ten months preceding the merger, Lehman’s book value plummeted by almost $57 million, or by about one-third.

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He remembers that in the face of “record earnings and bonuses,” Lew wanted to slash the bankers, particularly the shares and bonuses enjoyed by four senior bankers, Harvey Krueger, Peter Solomon, William Morris and Yves-André Istel. To reduce his shares, a partner sells back his stock to the firm at the current book value, which in late 1982 was about $1,250 per common share. These shares, in turn, are sold to partners designated by the board. What Glucksman wanted to do in September 1982 was to pare Krueger’s, Morris’s and Solomon’s shares from 2,500 to 2,000, the same number held by less senior partners. He wanted to drop Istel below 2,000 shares.

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Traditionally, the CEO at Lehman had the power, if there were disagreements, to make final decisions about the size of a partner’s bonus, including the size of the bonus of all seven members of the operating committee; in consultation with the board, he decided what percentage of the firm’s common shares (then showing a book value of $640.19 per share) each partner was entitled to. Dividing into subcommittees, the operating committee that summer interviewed individual partners, allowing each to make a case for how much business he had brought to Lehman that year; the full committee, after receiving the recommendations of department heads, reviewed these recommendations with the CEO, and then gave its sanction to the board.

Stock Market Wizards: Interviews With America's Top Stock Traders by Jack D. Schwager

Asian financial crisis, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Black-Scholes formula, book value, commodity trading advisor, computer vision, East Village, Edward Thorp, financial engineering, financial independence, fixed income, implied volatility, index fund, Jeff Bezos, John Meriwether, John von Neumann, junk bonds, locking in a profit, Long Term Capital Management, managed futures, margin call, Market Wizards by Jack D. Schwager, money market fund, Myron Scholes, paper trading, passive investing, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk-adjusted returns, short selling, short squeeze, Silicon Valley, statistical arbitrage, Teledyne, the scientific method, transaction costs, Y2K

The third element in the selection process is the balance sheet. I will compromise on disappointing reported earnings—that's usually why the stock got blasted in the first place—but I won't compromise on the balance sheet. The debt has to be manageable relative to the cash flow. Also, in my industries of interest, book value matters. Ideally, I like to buy a stock at near, or even under book value. One of the sad things about the current stock market environment is that it is so driven by earnings expectations that balance sheets are practically ignored. Fourth, I want to see either company share repurchases or insider buying. When the senior executives are buying shares for themselves, and particularly when the company is repurchasing its stock for the treasury, it sends a strong message that the downside is often limited and provides an added safety net.

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"out of the money," 150-51, 325, 329 Merrill Lynch, 142,259 Merton, Robert, 271 Microchip Technology, 158 intrinsic value of, 329-30 market for, 224-25, 230, 231-32, 325, 327-28, Microsoft, 22, 36-38, 57, 311 models for, 131-35, 221, 227-34, 312 over-the-counter, 140 329 Milestone Scientific, 65-66 premiums on, 101, 102, 103, 140, 159, 160, 325, Minervini, Mark, 169-88 background of, 169-70 out-of-the-money calls, 150-51, 325, 329 "overfitting the data," 270 overhead, 24 N fund managed by, 170 losses of, 171, 173-76, 179-80, 182, 184, 187, 188 .327, 328, 329, 330 pricing of, 221, 226-27, 229-30, 234, 236-38, 270, 325, 327-28, 329 pairs trading, 256-57 Pfizer, 130 target, 157-58, 161-64, 177-80, 183,257 trends in, xiii, 24, 45, 85-86, 89-90, 138-39, 155-56, 158,171, 178-84, 212, 216, 254, 278-79 Prime Computer, 37-38 private market value, 44 probability curve, 221, 227-34, 236-37 products, 63, 65, 68-69 Philadelphia Stock Exchange, 225, 226, 233 profit: Playboy Club, 99-100 "point of smooth sailing," 182 Pokemon, 276-77 poker, 177, 178, 202, 225 portfolios: insurance for, 320—21 management of, 78-81, 82 risk of, 306, 322-23 theory of, 211-12 positions, trading: covering of, 85-88, 103, 106, 142-46 disclosure of, 49-50 exposure of, 59, 64, 92-93, 106, 133, 164, 269 liquidation of, 16-17, 25, 46-47, 63, 64, 70, 73, 109, 114-15, 161-62, 167, 185, 217, 219-20, 236, 279-81, 308, 309, 314, 317 long, 15, 19-20, 31, 41^12, 46, 55, 63-64, 68, 80-81, 83, 90, 92, 93, 94, 153-54, 164, 178, 197,217,269,323,324 short, 12-13, 18-19, 24, 36, 38, 40, 44-52, 63-68, 75-94, 103, 108, 112, 149-54, 164, 204, 209, 216-17, 269, 276-81, 285, 293, 306, 315, 321-25 President's Committee of Advisors on Science and Technology, 259 "price action sandwich," 179 price/earnings ratio, 21, 22, 43-44, 52, 58, 59, 60, 62, 65,66, 72-73,79, 81, 89,92,94, 149, 152, 154-55, 158, 164, 165, 166-67, 172,216,306, 320,321,325 prices, stock: aggregate, 248 book value vs., 44 margin of, 45, 154-55, 165, 229, 299 target, 308 proprietary structures, 243 Psychology of Mastering the Markets, The (Kiev), 288 Quantech Fund, LP, 170 Quantech Research Group, 170 Quantum fund, 222 quarterly earnings report, 40, 60, 62-63, 84, 138-39, 141,215-17,286-87 Ranieri, Lewis, 249 ratios: capitalization/revenue, 36-37, 45, 52 debt/cash flow, 43 price/book value, 44 price/cash flow, 44 price/earnings, 21, 22, 43-44, 52, 58, 59, 60, 62, 65, 66, 72-73, 79, 81, 89, 92, 94, 149, 152, 154-55, 158, 164, 165, 166-67, 172, 216, 306, 320,321,325 price/sales, 44 return/risk, 70-71, 76, 125, 127, 128-29, 132, 134-35, 166, 207, 222, 237, 249-50, 255, 265, 269, 299, 323, 326 Rattner, Steve, 142-43 RCA, 229 real estate, 64 receivables, 91-92, 94, 324 INDEX Reindeer Capital, 1-3 religion, 208 replacement value, 248 research: brokerage, 55-56, 61-62 computer, 77, 81, 129-30, 157-58, 181, 194-95, 197, 202-3, 204, 208, 215, 255, 274, 319 consumer, 67-69 hypotheses in, 256, 265, 270, 274, 319 necessity of, xiii, 50, 59-60, 65-66, 100, 154-55, 160, 166, 189-90 reliability of, 25-26, 4 1 , 4 5 , 55-56, 165, 176-77, Schwartz, Eddie, 98-99 Securities and Exchange Commission (SEC), 39, 72, 80,89,235,251 prices of, sag prices, stuck Seinfeld, 276 Shaw, David, 254-74 relative linearity ol, 15 repurchase of, 1 7, 43, 45, 5 1, 162 response of, 15-16, 18,26,40-41,47-48,81, 235-36, 318 background of, 258—63 fund managed by, 254, 255. 257-58, 259, 272, 273, 304 profits of, 254, 255 strategy of, 19, 254-74, 301, 303, 304, 306, 320 Shearson Lehman Brothers, 191-92 sell-side, 61-62, 64, 65-66, 72, 73, 143 "sheet monkeys," 233 shopping malls, 67—68 short selling; see positions, trading, short technical, 190, 193, 194-95, 202-3, 206, 228-29, slippage, 203 185, 187,231,326 254-74, 320 Social Psychiatry Research Institute, 288 research and development (R£D), 89 Resolution Trust Corporation (RTC), 249-50 restructuring, 45-46 software, computer, 26, 86-88, 90, 139, 215 revenue, 65, 90, 92, 139 stockbrokers, 20-21, 56, 100, 207, 212-14 capitalization vs., 36-37, 45, 52 reverse franchising, 242 risk: exposure to, 59, 64, 92-93, 106, 1.33, 164, 269 of index funds, 34-37, 50, 53 "just-say-no," 244-45 management of, xiii, 30, 33, 54-55, 59, 63, 71-72, sec also sales, brokerage stock market: anomalies of, 254, 265-69 speculation, 20, 84-85, 177, 225-26 statistical arbitrage, 255—56 bull, 64, 75-76, 88, 92, 108, 162, 165, 183, 237, 255,284 corrections in, 16, 232 as efficient, 42, 50-51, 131-33, 147, 1 6 1 , 2 1 7 , 264, 265-69, 270, 320,328 environment of, 25, 29, 33, 38, 41, 47-48, 176, profit vs., 70-71, 76, 125, 127, 128-29, 132, 134-35, 166, 207, 222, 237, 249-50, 255, 265, forecasts of, 196, 269, 310-11 indexes of, 30, 31, 34-36, i 40; see also specific indexes 269, 299, 323, 326 S.A.C., 275, 288, 290-93 sales, brokerage: cold-calling for, 12, 56, 212-13 pitch for, 20-21, 48, 56, 59, 190-91, 212 sales, company, 44, 90 Salomon Brothers, 246-48, 249 Sambo's restaurants, 100, 101 Sanchez Computer Associates, 86-88 S&P500, 30, 31,34, 35-36, 52, 110-11, 113, 144-45, 149, 162-63, 196, 200, 235, 285 Scholcs, Myron, 271 Schrodinger, Inc., 259 Schwab, 149-52, 164 Schwager, Jo Ann, xi-xii privately held. 84-85 quality, 20, 1 1 1 restricted, 250-52 screening of, 42-46, 51-52, 59-63, 72-74, 89-94, 166-68, 171, 172-73, 187 technology, 64, 90-91, 92, 118, 1 5 1 , 162, 186, 229-30,249,269,310-11 tips on, 6, 13-14,20,25,72, 173, 176, 312 valuation of, 17, 45, 46-47, 58, 64, 67, 81, 83, 85-86,89-91, 152, 157, 160, 162-63,229-30, 256-57, 306-7, 322 volatility of, 102, 108, 115, 153, 197,330 stop-loss points. 162-63, 217, 220, 231, 232, 305, 308 Strategy for Daily Living, A (Kiev), 289 Sjrperper/ormtiMce Sfocfa (Love), !

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It is interesting how rational money managers become in a bear market. Only then do they begin to question the underlying valuations. Okay, continue with your list of stock selection factors. The fifth screen is value. The value has to be extremely compelling. How do you measure value? We use some conventional measures, such as price to sales, cash flow, book value, but not necessarily price to earnings because, as I pointed out before, the company could actually be losing money on a reported basis. The most important measure of value, however, which I admit is somewhat subjective, is price to intrinsic, or private market, value. What do you mean by private market value?

How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely by Andrew Craig

Airbnb, Alan Greenspan, Albert Einstein, asset allocation, Berlin Wall, bitcoin, Black Swan, bonus culture, book value, BRICs, business cycle, collaborative consumption, diversification, endowment effect, eurozone crisis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Future Shock, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, Long Term Capital Management, low cost airline, low interest rates, Market Wizards by Jack D. Schwager, mortgage debt, negative equity, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, passive income, pensions crisis, quantitative easing, Reminiscences of a Stock Operator, road to serfdom, Robert Shiller, Russell Brand, Silicon Valley, smart cities, stocks for the long run, the new new thing, The Wealth of Nations by Adam Smith, Yogi Berra, Zipcar

In this example, imagine they both make the same profit this year and are very likely to make the same profit next year. BOOK VALUE The book value is simply the value of all the assets a business owns, as added up by their accountants, and it is yet another way we can compare the value of one share to another. Imagine a company has lots of property and lots of cash in the bank. If you own a share in that company, you effectively own a share in those assets – as well as a share of any profits. The book value can be divided by the number of shares to give an idea of the value of existing assets that each share is entitled to.

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Before we move on, I want to make one final point about shares, which is that all of the above metrics can be applied to the stock market as a whole. This means that at any given time we can consider the P/E ratio, book value or dividend yield of the entire stock market and compare it to other stock markets (e.g. compare the UK to the US or Japan) or to the same market in other points in history. If we know that the P/E ratio or book value of a market is historically low, we have a much higher chance of making a great return on our money in the next few years than we would if those ratios were historically high. Obviously, things are more complicated in the real world than in our examples.

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In chapter 7 we looked briefly at earnings yield, dividend yield and book value. Once you have chosen a theme and made a list of companies you might consider to give you exposure to that theme, the next piece of the jigsaw puzzle is to find out these numbers based on the company’s current share price. These are all reasonably simple things to understand and are freely available on websites such as Yahoo or Google Finance – or from your stockbroker’s website. For each company, you should find the current year’s P/E, PEG, dividend yield and price-to-book ratio (i.e. book value per share). Where possible, you should also find out these numbers for next year.

Personal Investing: The Missing Manual by Bonnie Biafore, Amy E. Buttell, Carol Fabbri

asset allocation, asset-backed security, book value, business cycle, buy and hold, currency risk, diversification, diversified portfolio, Donald Trump, employer provided health coverage, estate planning, fixed income, Home mortgage interest deduction, index fund, John Bogle, Kickstarter, low interest rates, money market fund, mortgage tax deduction, risk tolerance, risk-adjusted returns, Rubik’s Cube, Sharpe ratio, stocks for the long run, Vanguard fund, Yogi Berra, zero-coupon bond

The PEG ratio doesn’t work well for industries valued on their assets, such as financial institutions, real estate operations, and airlines. If you’re looking at companies like these, use the price/book value ratio instead. • The price/book value ratio (also known as the price/book ratio) was made popular by Benjamin Graham after the 1929 stock market crash. The price/book ratio is the foundation of value investing, investing in companies that represent good value. Book value is another name for shareholders’ equity (page 108). You use book value per share (shareholders’ equity divided by the number of shares outstanding) to calculate the price/book value ratio, which helps you determine a stock’s value. A price/book ratio of less than 1.0 means the share price is less than the book value for one share, which means you can purchase the company for less than its net worth.

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A price/book ratio of less than 1.0 means the share price is less than the book value for one share, which means you can purchase the company for less than its net worth. The price/book value ratio can help you find good investment deals, because accounting practices are conservative about depreciating assets on a company’s books, like real estate. For example, a company may own buildings that are worth millions, but if those buildings are fully depreciated, they have a value of $0 on the company books. If that’s the case, you could purchase the company for less than the company’s assets are worth. If you sold the assets, you’d make an immediate profit.

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See long-term care (LTC) O open enrollment, for health insurance, 215 operating income, 106 operating net income per share, for REITs, 147 opinions, basing on last information heard, 49 P parents, caring for, 24, 34–35 payroll deduction IRA, 187 PEG (P/E to growth ratio), 123 pension plans, 29–30 P/E (price/earnings) ratio for a company, 120–122 P/E to growth ratio (PEG), 123 planning. See goals PLUS loans, 211 Point-of-Service plan, 214 portfolio review, 168 power players (type of investor), 46, 51–52 PPO (preferred provider organization), 214 pre-tax profit margin of a company, 119 price/book value ratio, 123 price/cash flow ratio, 124 price/earnings (P/E) ratio for a company, 120–122 price of bonds, 59, 136–137, 139 price ratios for a company, 120–124 price/sales ratio (PSR), 124 Principal Financial Group’s Eligibility and Contributions tool, 218 principal of bonds, 58, 129 profitability of a company, 118–120 profit, gross, 106 Index 233 profit margin for a company, 118 prospectus for bonds, 132 for funds, 77, 82, 89, 92 protectors (type of investor), 46, 46–48 PSR (price/sales ratio), 124 psychological pitfalls in investing, 45–52 Q quality of company, evaluating, 111–120 quick ratio of a company, 115 R rational price of a stock, 122 real estate investment trusts (REITs), 61–62, 141–143 cash reinvested by, 145 choosing, 144–152 depreciation affecting, 147 dividends from, 62, 142–143, 145, 148 profits of, 146 screening, 149–152 tax issues regarding, 63, 69, 142 types of, 143–144 receivables turnover ratio, 118 redemption fees, 91 red zone, 189–191 reinvesting dividends, 158 reinvestment risk, 159 REIT ETFs, 62 REIT mutual funds, 62, 150–152 REITs.

100 Baggers: Stocks That Return 100-To-1 and How to Find Them by Christopher W Mayer

Alan Greenspan, asset light, bank run, Bear Stearns, Bernie Madoff, book value, business cycle, buy and hold, Carl Icahn, cloud computing, disintermediation, Dissolution of the Soviet Union, dumpster diving, Edward Thorp, Henry Singleton, hindsight bias, housing crisis, index fund, Jeff Bezos, market bubble, Network effects, new economy, oil shock, passive investing, peak oil, Pershing Square Capital Management, shareholder value, Silicon Valley, SimCity, Stanford marshmallow experiment, Steve Jobs, stock buybacks, survivorship bias, Teledyne, The Great Moderation, The Wisdom of Crowds, tontine

I’ll just add some basic math about the importance of earning a high return on capital and—you can’t forget this second part—the ability to reinvest at high rates for years on end. Phelps walks through an example in his book that is worth repeating here. Assume a company has $10 per share in book value and earns 15 percent on that capital. At the end of one year, book value will be $11.50 per share, if the stock pays no dividend. At the end of the second year, it will be $13.22, and at the end of the third year $15.20. “In five years, the company’s book value will have doubled,” Phelps writes. “In 10 years, it will have quadrupled. In 33 years, it will be up one hundredfold.” If the company had paid dividends, the story would be quite different.

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In the 1981 letter, he wrote about how inflation made Berkshire’s “apparently satisfactory results . . . illusory as a measure of true investment results for our owners.” In the 1979 letter he wrote this: One friendly but sharp-eyed commentator on Berkshire has pointed out that our book value at the end of 1964 would have bought about one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce. 150 100-BAGGERS A similar comparison could be drawn with Middle Eastern oil. The rub has been that government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil.

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These are mostly Canadian companies, as Donville focuses on Canada. His picks for 2014, in the January letter, included Home Capital. THE KEY TO 100-BAGGERS 77 I share the Donville story to make a couple of points. First, it’s important to think about what a company can earn on the money it invests. When a company can build book value per share over time at a high clip, that means it has the power to invest at high rates of return. The second point I want to make is how time is your friend when you own such stocks. In just 16 years, Home Capital multiplied its investors’ wealth 49-fold. You could only get that return by holding onto the stock through thick and thin.

SQL Hacks by Andrew Cumming, Gordon Russell

Apollo 13, bioinformatics, book value, business intelligence, business logic, business process, database schema, en.wikipedia.org, Erdős number, Firefox, full text search, Hacker Conference 1984, Hacker Ethic, leftpad, Paul Erdős, SQL injection, Stewart Brand, web application

People phone one of two possible operators (called X and Y) to check seat availability and make bookings: CREATE TABLE seat ( chairid INT, updateid INT, booked varchar(20) ) ENGINE=InnoDB; INSERT INTO seat (chairid,updateid,booked) VALUES (1,1,NULL); INSERT INTO seat (chairid,updateid,booked) VALUES (2,1,NULL); INSERT INTO seat (chairid,updateid,booked) VALUES (3,1,NULL); INSERT INTO seat (chairid,updateid,booked) VALUES (4,1,NULL); INSERT INTO seat (chairid,updateid,booked) VALUES (5,1,NULL); INSERT INTO seat (chairid,updateid,booked) VALUES (6,1,NULL); You need to specify ENGINE=InnoDB only if you are using MySQL and InnoDB is not the default; delete this phrase (but keep the semicolon) on all other platforms.

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Consider a booking system for a small theatre. The theatre has four seatstwo at the front and two at the back: CREATE TABLE seat ( chairid INT, location varchar(20), booked varchar(20)) ENGINE=InnoDB; INSERT INTO seat (chairid,location,booked) VALUES (1,'front',NULL); INSERT INTO seat (chairid,location,booked) VALUES (2,'front',NULL); INSERT INTO seat (chairid,location,booked) VALUES (3,'back',NULL); INSERT INTO seat (chairid,location,booked) VALUES (4,'back',NULL); You need to specify ENGINE=InnoDB only if you are using MySQL and InnoDB is not the default; delete this phrase (but keep the semicolon) on all other platforms. Be sure to run SHOW WARNINGS after you issue the CREATE TABLE statement.

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum, Joshua Pearl, Joseph R. Perella

accelerated depreciation, asset allocation, asset-backed security, bank run, barriers to entry, Benchmark Capital, book value, business cycle, capital asset pricing model, collateralized debt obligation, corporate governance, credit crunch, discounted cash flows, diversification, equity risk premium, financial engineering, fixed income, impact investing, intangible asset, junk bonds, London Interbank Offered Rate, performance metric, risk free rate, shareholder value, sovereign wealth fund, stocks for the long run, subprime mortgage crisis, technology bubble, time value of money, transaction costs, yield curve

EXHIBIT 5.18 Cash on Hand Uses of Funds Links Purchase ValueCo Equity As shown in Exhibit 5.19, ValueCo’s existing shareholders’ equity of $700 million, which is included in the $825 million purchase price, was eliminated as a negative adjustment and replaced by the sponsor’s equity contribution (less other fees and expenses). EXHIBIT 5.19 Purchase ValueCo Equity Goodwill Created Goodwill is created from the excess amount paid for a target over its existing book value. For the ValueCo LBO, it is calculated as the equity purchase price of $825 million less book value of $700 million. As shown in Exhibit 5.20, the net value of $125 million is added to the existing goodwill of $175 million, summing to total pro forma goodwill of $300 million.178 The goodwill created remains on the balance sheet (unamortized) over the life of the investment, but is tested annually for impairment.

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A marginal tax rate of 35% to 40% is generally assumed for modeling purposes, but the company’s actual tax rate (effective tax rate) in previous years can also serve as a reference point.79 Depreciation & Amortization Projections Depreciation is a non-cash expense that approximates the reduction of the book value of a company’s long-term fixed assets or property, plant, and equipment (PP&E) over an estimated useful life and reduces reported earnings. Amortization, like depreciation, is a non-cash expense that reduces the value of a company’s definite life intangible assets and also reduces reported earnings.80 Some companies report D&A together as a separate line item on their income statement, but these expenses are more commonly included in COGS (especially for manufacturers of goods) and, to a lesser extent, SG&A.

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Step III(c): Link Sources and Uses to Balance Sheet Adjustments Columns Once the sources and uses of funds are entered into the model, each amount is linked to the appropriate cell in the adjustments columns adjacent to the opening balance sheet (see Exhibit 5.15). Any goodwill that is created, however, needs to be calculated on the basis of equity purchase price and existing book value of equity (see Exhibit 5.20). The equity contribution must also be adjusted to account for any transaction-related fees and expenses (other than financing fees) that are expensed upfront.177 These adjustments serve to bridge the opening balance sheet to the pro forma closing balance sheet, which forms the basis for projecting the target’s balance sheet throughout the projection period.

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry by William K. Black

accounting loophole / creative accounting, affirmative action, Alan Greenspan, Andrei Shleifer, Black Monday: stock market crash in 1987, book value, business climate, cognitive dissonance, corporate governance, corporate raider, Donald Trump, fear of failure, financial deregulation, friendly fire, George Akerlof, hiring and firing, junk bonds, margin call, market bubble, Michael Milken, money market fund, moral hazard, offshore financial centre, Ponzi scheme, race to the bottom, Ronald Reagan, Savings and loan crisis, short selling, The Market for Lemons, transaction costs

We buy an S&L that has $200 million (book value) in mortgages that the S&L lent in 1977 at an 8 percent interest rate. On a market-value basis, however, they are only worth $160 million because the market interest rate for a comparable mortgage is now 16 percent. The key is that we create a new book value when we acquire these mortgages through the merger. Their book value becomes $160 million. The $205 million in liabilities at the S&L we are buying are very short-term deposits. Short-term deposits do not change materially in value when interest rates change, so their book value is unchanged by the merger accounting.

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Again, we assume that market interest rates for comparable mortgages are 16 percent at the time of the merger and fall one year later to 12 percent. One could sell only the acquired mortgages for a gain because only they got a new (lower) book value through the mark-to-market. The buyer’s mortgages have market, but not book, values identical to those of the mortgages acquired through the merger. The book value of the buyer’s mortgages is still $200 million. If we sell them one year after the merger for their market price of $180 million, we have to book a $20 million loss under GAAP. The S&L league seriously proposed that the entire industry mark its assets to market and create $150 billion in goodwill so that S&Ls could engage in gains trading without finding a merger partner.

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The other implication is that the acquirer knows that the profit is fictitious and that failure is certain, which maximizes the perverse incentives to engage in reactive control fraud. Second, the Internal Revenue Service (IRS) treats this transaction for tax purposes as a loss. The IRS says that if one started with assets that had a book value of $200 million and sold them for $180 million, there is a $20 million loss for tax purposes that can be used to offset tax liability on GAAP profits. This is the second way in which goodwill mergers increased net income.6 Third, one could maximize this fictitious income only through a merger.

Mastering Spreadsheet Bookkeeping by Peter Marshall

accounting loophole / creative accounting, book value, double entry bookkeeping

Methods of calculating depreciation • Straight line method • Diminishing (or reducing) balance method • Sum of the digits method • Machine hours method • Revaluation method • Depletion method • Sinking fund method • Sinking fund with endowment method Even this list is not exhaustive, but the first two are the most common. Straight line method This involves deducting a fixed percentage of the asset’s initial book value, minus the estimated residual value, each year. The estimated residual value means the value at the end of its useful life within the business (which may be scrap value). The percentage deducted each year is usually 20 per cent or 33.33 per cent and reflects the estimated annual fall in the asset’s value.

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Column 22 is for recording any expenses, allowable against tax, that do not fall into the other categories. Column 23 is for recording any expenses that are not allowable against tax, e.g. expenses which cannot be proved because the documentation has been lost. Column 24 is for recording the net book value of fixed assets that have been disposed of. These are outgoings because they reduce the total assets of the business. Column 25 is for recording the values of fixed assets purchased in the current year. Column 26 is for recording new material depreciation on fixed assets. Column 27 is for recording adjustments to stock values, e.g. opening and closing stock.

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Now we need to make some links: Now there are four formulae to put in: The final thing to do in order to complete this report is to highlight cells C8, C11 and C14 by holding down the control key while clicking into each cell and then insert a bottom border by clicking on the borders icon in the fonts group on the ribbon and selecting the bottom border option. Now click on cell C18 and insert both top and bottom borders into that cell by selecting the top and bottom border option. Now we need to deal with asset disposals: if fixed assets have been disposed of their net book value will have to be removed from the fixed assets account and any profit or loss entered into the profit and loss account. The first thing you have to do is configure two more columns on the assets worksheet. Proceed as follows: Cell reference What to type in E 4 Summary of fixed asset disposals E 6 NVB of disposals Q1 E 7 Sale proceeds Q1 E 8 Profit or loss Q1 E 9 NBV of disposals Q2 E 10 Sale proceeds Q2 E 11 Profit or loss Q2 E 12 NVB of disposals Q3 E 13 Sale proceeds Q3 E 14 Profit or loss Q3 E 15 NVB of disposals Q4 E 16 Sale proceeds Q4 E 17 Profit or loss Q4 Embolden and underline the contents of cell E4, by clicking on the bold and underline icons in the fonts group on the ribbon, because it is the title of the sheet.

Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game by Walker Deibel

barriers to entry, Blue Ocean Strategy, book value, Clayton Christensen, commoditize, deal flow, deliberate practice, discounted cash flows, diversification, drop ship, Elon Musk, family office, financial engineering, financial independence, high net worth, intangible asset, inventory management, Jeff Bezos, knowledge worker, Lean Startup, Mark Zuckerberg, meta-analysis, Network effects, new economy, Peter Thiel, risk tolerance, risk/return, rolodex, software as a service, Steve Jobs, subscription business, supply-chain management, Y Combinator

The most common ways to value a company are asset based and cash flow based. It’s important to understand them, even if they’re not applicable, so that you can begin to understand how others apply or calculate approximate value. 149 ASSET-BASED VALUATION There are three main asset-based valuations: book value (BV), fair market value (FMV), and liquidation value (LV). BOOK VALUE Book value we discussed earlier while reviewing the balance sheet. It’s the net worth of the company as reported by its financial statement under owner’s equity. It applies the value of the assets currently on the books, then subtracts the liabilities. This can be an interesting academic understanding, but in my experience, it’s not at all accurate.

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However, the government classifies any company vehicle under 6,000 pounds in weight as a “luxury” automobile and applies restrictions to the rate of depreciation. This essentially ensures any book value would not match what the installation truck could be sold for on the open market. Ever try to sell a three-year-old computer? How about a short-run perfect binding machine without an in-line cutter? We’ve discussed that the assets are only as good as their ability to produce earnings, and this is the second reason book value doesn’t apply for you. As a buyer, what you are really interested in is the cash flow that is generated by the business. The infrastructure is simply the existing vehicle that creates those earnings.

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A turnaround describes the acquisition of a company that has fallen on hard times, with the goal of improving operations, building efficiencies, and strengthening the value that the company provides to its customers. It’s the company version of the “fixer-upper.” Often, however, the best opportunities are with companies in pretty bad shape, even bankrupt. Typically, a turnaround opportunity is not valued on positive earnings because they’re usually not producing positive earnings. Instead, book value, liquidation value, or some similar metric applies a discount into the more typical, positive-earnings-multiplied formula. I have seen deals where taking over the debt for the opportunity to turn the company around is a horrible idea because they owe too much, and I have also seen where the debt is comfortable under the liquidation value.

Buffett by Roger Lowenstein

Alan Greenspan, asset allocation, Bear Stearns, book value, Bretton Woods, buy and hold, Carl Icahn, cashless society, collective bargaining, computerized trading, corporate raider, credit crunch, cuban missile crisis, Eugene Fama: efficient market hypothesis, index card, index fund, interest rate derivative, invisible hand, Jeffrey Epstein, John Meriwether, junk bonds, Long Term Capital Management, Michael Milken, moral hazard, Paul Samuelson, random walk, risk tolerance, Robert Shiller, Ronald Reagan, Savings and loan crisis, selection bias, Teledyne, The Predators' Ball, traveling salesman, Works Progress Administration, Yogi Berra, young professional, zero-coupon bond

What the “numbers” told Buffett was that California chocoholics were willing to pay a premium price for the See’s well-regarded brand. But the price for the company was $30 million. Buffett and Munger were dissuaded by the paltry level of the See’s book value, and would go no higher than $25 million.4 There the talks ended. In this case, Buffett had made a common mistake. Investors often assume that book value approximates, or at least is suggestive of, what a company is “worth.” In fact, the two express quite different concepts. Book value is equal to the capital that has gone into a business, plus whatever profits have been retained. An investor is concerned with how much can be taken out in the future; that is what determines a company’s “worth” (or its “intrinsic value,” as Buffett would say).

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An investor is concerned with how much can be taken out in the future; that is what determines a company’s “worth” (or its “intrinsic value,” as Buffett would say). Suppose, for a moment, that a new company invested in candy-making equipment, stores, and inventory identical to those of See’s. Its book value would be the same, but the name on its candy box would be unknown. And this upstart, having far less earning power, would be worth far less. Since book value is blind to intangibles such as brand name, for a company such as See’s it is meaningless as an indicator of value. But Buffett and Munger got lucky. See’s rang back and took the $25 million—Buffett’s biggest investment by far.

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In an inflationary era, this was no less suicidal than agreeing to set a price on Hathaway yarn for the year 2010. Alas, understanding inflation did not provide immunity to it. Buffett pointed out, with no little agony, that when he had taken over Berkshire the book value of one share could have bought one half-ounce of gold and that, after fifteen years in which he had managed to raise the book value from $19.46 a share to $335.85, it would still buy the same half-ounce.33 The best that he could do was to invest in companies that might resist inflation’s ravages, such as General Foods and R. J. Reynolds Industries. Buffett figured that well-known consumer brands, such as Post cereals and Winston cigarettes, would be able to raise prices at a pace with inflation.

The Asian Financial Crisis 1995–98: Birth of the Age of Debt by Russell Napier

Alan Greenspan, Asian financial crisis, asset allocation, bank run, banking crisis, banks create money, Berlin Wall, book value, Bretton Woods, business cycle, Buy land – they’re not making it any more, capital controls, central bank independence, colonial rule, corporate governance, COVID-19, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, Deng Xiaoping, desegregation, discounted cash flows, diversification, Donald Trump, equity risk premium, financial engineering, financial innovation, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, hindsight bias, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, if you build it, they will come, impact investing, inflation targeting, interest rate swap, invisible hand, Japanese asset price bubble, Jeff Bezos, junk bonds, Kickstarter, laissez-faire capitalism, lateral thinking, Long Term Capital Management, low interest rates, market bubble, mass immigration, means of production, megaproject, Mexican peso crisis / tequila crisis, Michael Milken, Money creation, moral hazard, Myron Scholes, negative equity, offshore financial centre, open borders, open economy, Pearl River Delta, price mechanism, profit motive, quantitative easing, Ralph Waldo Emerson, regulatory arbitrage, rent-seeking, reserve currency, risk free rate, risk-adjusted returns, Ronald Reagan, Savings and loan crisis, savings glut, Scramble for Africa, short selling, social distancing, South China Sea, The Wealth of Nations by Adam Smith, too big to fail, yield curve

As things stand at the minute, it looks as if the good bankers will be forced to buy the bad banks with negative net worth. There will be an instantaneous decline in a book value which is already shrinking rapidly. Perhaps as the process continues, this dilution of bank capital will be seen as unpalatable – but what is the alternative? This is not to say that bank and finance counters in Thailand will never be a buy. However, given the surge in share prices and the current premium-to-book values, the market is not accounting for the risks associated with mass bankruptcy in the sector and the need for the good capital to be used to bail out the bad.

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To buy equities in the distressed jurisdictions you are betting that the indigenous corporation will arise victorious despite the crushing pressures of the cycle, the alteration in habitat and the introduction of the new predator. Indeed you are backing the indigenous corporation at odds on. With these companies trading at average 50% premiums to book value, you are making a long-term bet that they will produce above-par returns in this new environment! If you don’t believe in their ability to thrive in this new environment, then dig a hole in the ground, build your own capacity at a book value of one and do it yourself. Even if your business venture fails, you will not have paid a premium for the privilege of extinction. Somewhere out there is a new genus of corporation which may be populated with creatures such as Guinness Philippines, GE Indonesia and Unilever Thailand.

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It is crucial that such mistakes have been avoided, otherwise 3× book is an expensive price to pay for the Kuala Lumpur Composite Index just as we enter an economic slowdown! If the net assets of a company are worth US$100 and the share price trades at US$300, the company is said to be valued at 3× book value. To pay such a premium for corporate capital assumes an ability among management to achieve returns well in excess of the returns any investor can achieve by putting their capital in a relatively risk-free investment such as a bank account. The premium is paid while recognising the risks that management may also fall short of producing such returns, while the depositor can often lock in a fixed yield for some years to come.

A Man for All Markets by Edward O. Thorp

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", 3Com Palm IPO, Alan Greenspan, Albert Einstein, asset allocation, Bear Stearns, beat the dealer, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, book value, Brownian motion, buy and hold, buy low sell high, caloric restriction, caloric restriction, carried interest, Chuck Templeton: OpenTable:, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, Garrett Hardin, George Santayana, German hyperinflation, Glass-Steagall Act, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Bogle, John Meriwether, John Nash: game theory, junk bonds, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, Mason jar, merger arbitrage, Michael Milken, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, PalmPilot, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, power law, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, risk-adjusted returns, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stock buybacks, stocks for the long run, survivorship bias, tail risk, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Tragedy of the Commons, uptick rule, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

Here’s how it is done. Imagine a hypothetical mutual savings and loan, which we’ll call Magic Wand S&L, or MW, with $10 million in liquidation or book value, and net income of $1 million per year. If MW were a stock bank with one million shares outstanding, each share would have a book value of $10 and earn $1 per share, which is 10 percent of book value. Suppose that if there were such a thing as MW stock, it would, as is typical, trade at one times book value, or $10 per share. Management decides to “convert” MW to a stock savings and loan and issue for the first time one million shares of stock at $10 per share, for proceeds of $10 million.

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It opens at $12 and over the next few weeks slowly moves up to $16, still below the $20 per share paid for comparable stocks that have traded for a while in the market. It doesn’t quite make it to $20. Why not? First, the net cash to Magic Wand is a little less than $10 per share because the underwriters get a few percent of the proceeds, so the new book value is a little less than $20, perhaps $19.30 per share. Second, the market price of S&Ls fluctuates and the group has been a little weak lately. The price has dropped a couple of points below book value. Third, it will take management time to put the new cash to work, so earnings won’t reach $2 per share for a year or two. Even so, we made 60 percent in a few weeks. Many of the players in this game, so-called flippers, take their profit in the first few days and move on.

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Daily historical prices of stocks, the dates and amounts of any cash dividends paid, and other data were marketed by CRSP, the University of Chicago’s Center for Research in Security Prices. The Compustat database provided historical balance sheet and income information. Of the scores of indicators we systematically analyzed, several correlated strongly with past performance. Among them were earnings yield (annual earnings divided by price), dividend yield, book value divided by price, momentum, short interest (the number of shares of a company currently sold short), earnings surprise (an earnings announcement that is significantly and unexpectedly different from the analysts’ consensus), purchases and sales by company officers, directors, and large shareholders, and the ratio of total company sales to the market price of the company.

The Oil Factor: Protect Yourself-and Profit-from the Coming Energy Crisis by Stephen Leeb, Donna Leeb

Alan Greenspan, book value, Buckminster Fuller, buy and hold, currency risk, diversified portfolio, electricity market, fixed income, government statistician, guns versus butter model, hydrogen economy, income per capita, index fund, low interest rates, mortgage debt, North Sea oil, oil shale / tar sands, oil shock, peak oil, profit motive, reserve currency, rising living standards, Ronald Reagan, shareholder value, Silicon Valley, Vanguard fund, vertical integration, Yom Kippur War, zero-coupon bond

We think a lot more than it was trading for in early 2003. Over the long haul virtually every metric associated with Berkshire, ranging from book value to share price, has outpaced the S&P 500 by a factor of two or more. Even more remarkable is the consistency of this performance. Only once between 1965 and 2003 did Berkshire’s book value decline. During the total of five years in which stocks suffered double-digit losses, including the terrible bear markets of the early 1970s and more recently the early 2000s, Berkshire’s book value increased in all but one year and had a total compounded gain during those five miserable years of more than 35 percent.

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Until that merger in 1998, you’d have to say that Berkshire’s main asset was the genius of its head, Warren Buffett, who, disdainful of investing trends and conventional wisdom, demonstrated a preternatural ability to pick stocks and businesses that blossomed into major winners. Buffett bought Berkshire Hathaway in 1965 and turned it into a vehicle for buying shares in public companies as well as for gaining ownership of a number of privately owned businesses. Since then, the company’s book value has grown from $19 a share to more than $41,000. That works out to a remarkable annual compounded gain of 22.2 percent, compared to 10 percent for the S&P 500. Prior to 1998 you more or less could have duplicated Buffett’s performance simply by buying the stocks that Berkshire was accumulating.

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During the total of five years in which stocks suffered double-digit losses, including the terrible bear markets of the early 1970s and more recently the early 2000s, Berkshire’s book value increased in all but one year and had a total compounded gain during those five miserable years of more than 35 percent. This compares to losses in the S&P 500 of 72 percent. Clearly, Berkshire is worth a tremendous premium to the market both for its exceptional growth prospects and its record of protecting investors when times are bad. Yet in terms of most metrics, such as earnings, book value, and cash flow, the stock trades at a discount or at no premium. One quick note: as you probably know, Berkshire has two classes of stocks, A shares and B shares. The A shares are priced thirty times higher and investors in them have voting rights, but there is no difference in terms of core value. So it’s your choice.

The Little Book That Still Beats the Market by Joel Greenblatt

backtesting, book value, General Magic , index fund, intangible asset, random walk, survivorship bias, transaction costs

But I guess this is just another place where the magic formula is being uncooperative. Most people would expect value stocks (mainly because they are already considered cheap when purchased) to hold up much better in down markets and perhaps underperform a bit in up markets. This is probably true for stocks selling at low multiples of price-to-book value or price-to-sales. However, it’s pretty clear that this has not been the case for the magic formula over the last 22 years. I can only speculate that since the magic formula is heavily earnings based, during down markets investors sense less protection from a company’s high recent earnings than from high levels of assets or sales.

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First, much of the available historical stock market data from outside the United States is seriously flawed, and backtest results would not be reliable. It is helpful to know, however, that most historical studies over the last several decades involving classic (and less problematic to test) value characteristics, such as low price to earnings, low price to book value, and low price to sales have proved equally effective in both the United States and international markets. But second, and perhaps more important, we are very confident that the principles behind the magic formula are universal. Buying above-average companies at below-average prices makes sense in all markets.

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Simple methods for beating the market have been well known for quite some time. Many studies over the years have confirmed that value-oriented strategies beat the market over longer time horizons. Several different measures of value have been shown to work. These strategies include, but are not limited to, selecting stocks based upon low ratios of price to book value, price to earnings, price to cash flow, price to sales, and/or price to dividends. Similar to the results found in the magic formula study, these simple value strategies do not always work. However, measured over longer periods, they do. Though these strategies have been well documented over many years, most individual and professional investors do not have the patience to use them.

Andrew Carnegie by David Nasaw

banking crisis, book value, British Empire, Burning Man, business climate, business cycle, business logic, California gold rush, clean water, collective bargaining, company town, Corn Laws, Cornelius Vanderbilt, crony capitalism, David Brooks, death from overwork, delayed gratification, financial independence, flying shuttle, full employment, housing crisis, indoor plumbing, invention of the steam engine, it's over 9,000, James Watt: steam engine, Khartoum Gordon, land reform, land tenure, Louis Pasteur, Monroe Doctrine, price stability, railway mania, Republic of Letters, strikebreaker, Thomas Malthus, transcontinental railway, traveling salesman, union organizing, Upton Sinclair, vertical integration, work culture , Works Progress Administration

He does not like his own medicine.”13 Phipps had designed the “ironclad” arrangement in the winter of 1886–87 during Carnegie’s convalescence from his near-fatal illness. To enable the firm to buy back the shares of deceased members without bankrupting itself, Phipps had set the “book value” of the company’s stock below the market value and stipulated that the firm had to pay only this “book value.” The “ironclad”—so named because it was considered unbreakable—further stipulated that at any time, for any reason, an individual partner could be expelled from the firm and required to sell back his shares at “book value,” if a combination of three quarters of the partners, holding three quarters of the total stock, requested him to do so. It is not exactly clear what Phipps’s objections were to the “ironclad,” but he may well have feared giving his partners the right to expel him from the firm at some later date.

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Having no stock to sell, or anything like that, to the public, and no credit to keep up in the public eye, they prided themselves on going to the other extreme.”24 Phipps’s “ironclad” agreement not only provided that a deceased partner’s stock could be bought back at the discounted “book value,” but gave the remaining partners plenty of time to do so—a full fifteen years in the case of Carnegie’s 50 percent share of the company. There was a second part to the agreement. Phipps proposed that at any time in the future, for any cause whatsoever or no cause at all, three quarters of the stockholders, if they held among them three quarters of the stock, could force any of the partners to leave the company and sell back his interest at “book value.” Since Carnegie held 50 percent of the stock, no ejection could take place unless he agreed to it.

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Carnegie Steel stock was not to be traded for; the partners had signed the ironclad agreement precisely to prevent such deals. When a partner was ready to leave the company, he had no choice but to sell his stock back to the company—at book value. “Don’t try to negotiate with H.P. for his interest because he won’t negotiate…. Bargains from poor men carry noblessing—‘The Books’ has been our rule why should it be changed? The firm can buy any of his shares with my approval at the Books.” Not yet finished berating his junior partner, Carnegie went on to criticize him for not adjusting the book value of the Keystone Bridge properties, as Phipps, fearing his shares were undervalued, had begged him to do. “You promised him to fix it….

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

affirmative action, Alan Greenspan, Albert Einstein, anti-communist, AOL-Time Warner, Ayatollah Khomeini, barriers to entry, Bear Stearns, Black Monday: stock market crash in 1987, Bob Noyce, Bonfire of the Vanities, book value, Brownian motion, capital asset pricing model, card file, centralized clearinghouse, Charles Lindbergh, collateralized debt obligation, computerized trading, Cornelius Vanderbilt, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, do what you love, Donald Trump, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, Fairchild Semiconductor, Fillmore Auditorium, San Francisco, financial engineering, Ford Model T, Garrett Hardin, Glass-Steagall Act, global village, Golden Gate Park, Greenspan put, Haight Ashbury, haute cuisine, Honoré de Balzac, If something cannot go on forever, it will stop - Herbert Stein's Law, In Cold Blood by Truman Capote, index fund, indoor plumbing, intangible asset, interest rate swap, invisible hand, Isaac Newton, it's over 9,000, Jeff Bezos, John Bogle, John Meriwether, joint-stock company, joint-stock limited liability company, junk bonds, Larry Ellison, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, Marshall McLuhan, medical malpractice, merger arbitrage, Michael Milken, Mikhail Gorbachev, military-industrial complex, money market fund, moral hazard, NetJets, new economy, New Journalism, North Sea oil, paper trading, passive investing, Paul Samuelson, pets.com, Plato's cave, plutocrats, Ponzi scheme, proprietary trading, Ralph Nader, random walk, Ronald Reagan, Salesforce, Scientific racism, shareholder value, short selling, side project, Silicon Valley, Steve Ballmer, Steve Jobs, supply-chain management, telemarketer, The Predators' Ball, The Wealth of Nations by Adam Smith, Thomas Malthus, tontine, too big to fail, Tragedy of the Commons, transcontinental railway, two and twenty, Upton Sinclair, War on Poverty, Works Progress Administration, Y2K, yellow journalism, zero-coupon bond

Buffett measures his performance not by the company’s stock price, which he didn’t control, but by increase in net worth per share, which he did. There is a link between these two measures over long periods of time. In 1999, book value per share had grown only ½ of 1%. But for the acquisition of General Re, book value per share would have shrunk. Meanwhile, the stock market as a whole was up 21%. Buffett called it a fluke that book value had increased at all, pointing out that in some years it will inevitably decrease. Yet only 4 times in 35 years under Buffett, and not once since 1980, had Berkshire done worse than the market by this measure. 19.

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Dempster Mill Manufacturing, a family-run company in the worst sense of the word, made windmills and water irrigation systems in Beatrice,*21 Nebraska. This episode of Buffett’s career had started like putting a quarter in yet another slot machine to get a dollar back—or so it seemed. The stock sold for $18 a share and the company had a steadily growing book value of $72 a share. (“Book value” is the stated value of a company’s assets less what it owes—like a house less the mortgage, or cash in the bank less a credit card balance.) In the case of Dempster, the assets were windmills, irrigation equipment, and its own manufacturing plant. In 1958, Warren had driven out to Beatrice, a windswept prairie town that depended on Dempster as its sole important employer.

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Buffett bought the house in 1958. 39. Evelyn Simpson, “Looking Back: Swivel Neck Needed for Focus Change Today,” Omaha World-Herald, October 5, 1969. Chapter 34 1. Carol Loomis, “Hard Times Come to the Hedge Funds,” Fortune, January 1970, the first of a series of Loomis articles that showcase Buffett’s opinions. 2. Book value. Tangible book value was $43. Warren Buffett letter to partners, October 9, 1969. 3. Ibid. 4. The more inquisitive partners may have discovered that Berkshire Hathaway owned Sun Newspapers by reading its 1968 annual report. 5. Letter to partners, October 9, 1969. Buffett explained that he expected stocks to yield about 6½% after tax for the next ten years, roughly the same as a “purely passive investment in tax-free bonds.”

Capital in the Twenty-First Century by Thomas Piketty

accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, book value, Branko Milanovic, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon tax, central bank independence, centre right, circulation of elites, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, Future Shock, German hyperinflation, Gini coefficient, Great Leap Forward, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, low interest rates, market bubble, means of production, meritocracy, Money creation, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, Paul Samuelson, pension reform, power law, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Robert Solow, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, Suez canal 1869, Suez crisis 1956, The Nature of the Firm, the payments system, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, twin studies, very high income, Vilfredo Pareto, We are the 99%, zero-sum game

For companies not so listed, either because they are too small or because they choose not to finance themselves via the stock market (perhaps in order to preserve family ownership, which can happen even in very large firms), the market value is calculated for national accounting purposes with reference to observed stock prices for listed firms as similar as possible (in terms of size, sector of activity, and so on) to the unlisted firm, while taking into account the “liquidity” of the relevant market.21 Thus far I have used market values to measure stocks of private wealth and national wealth. The accounting value of a firm, also called book value or net assets or own capital, is equal to the accumulated value of all assets—buildings, infrastructure, machinery, patents, majority or minority stakes in subsidiaries and other firms, vault cash, and so on—included in the firm’s balance sheet, less the total of all outstanding debt. FIGURE 5.6. Market value and book value of corporations Tobin’s Q (i.e. the ratio between market value and book value of corporations) has risen in rich countries since the 1970s–1980s. Sources and series: see piketty.pse.ens.fr/capital21c.

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The same will be true if the firm earns 50 million in profits and decides to create a reserve to finance new investments worth 50 million: the stock price will rise by the same amount (because everyone knows that the firm has new assets), so that both the market value and the book value will increase to 150 million. The difficulty arises from the fact that anticipating the future of the firm quickly becomes more complex and uncertain. After a certain time, for example, no one is really sure whether the investment of 50 million euros several years earlier is really economically useful to the firm. The book value may then diverge from the market value. The firm will continue to list investments—in new offices, machinery, infrastructure, patents, and so on—on its balance sheet at their market value, so the book value of the firm remains unchanged.22 The market value of the firm, that is, its stock market capitalization, may be significantly lower or higher, depending on whether financial markets have suddenly become more optimistic or pessimistic about the firm’s ability to use its investments to generate new business and profits.

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Sources and series: see piketty.pse.ens.fr/capital21c. In theory, in the absence of all uncertainty, the market value and book value of a firm should be the same, and the ratio of the two should therefore be equal to 1 (or 100 percent). This is normally the case when a company is created. If the shareholders subscribe to 100 million euros worth of shares, which the firm uses to buy offices and equipment worth 100 million euros, then the market value and book value will both be equal to 100 million euros. The same is true if the firm borrows 50 million euros to buy new machinery worth 50 million euros: the net asset value will still be 100 million euros (150 million in assets minus 50 million in debt), as will the stock market capitalization.

Dead Companies Walking by Scott Fearon

Alan Greenspan, bank run, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, book value, business cycle, Carl Icahn, corporate raider, cost per available seat-mile, creative destruction, crony capitalism, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, Golden Gate Park, hiring and firing, housing crisis, index fund, it's over 9,000, Jeff Bezos, John Bogle, Joseph Schumpeter, Larry Ellison, late fees, legacy carrier, McMansion, moral hazard, multilevel marketing, new economy, pets.com, Ponzi scheme, Ronald Reagan, short selling, short squeeze, Silicon Valley, Snapchat, South of Market, San Francisco, Steve Jobs, survivorship bias, Upton Sinclair, Vanguard fund, young professional

He’d figured out that if you walked like Carl Lewis ran, you could make every green light heading uptown. But when it came to picking stocks, Geoff was never in a hurry. He was very deliberate. And he believed in something extremely unusual in those days—actual research. More than anything—more than projections and book values and price-to-earnings ratios—Geoff believed human-to-human contact was the best way to gauge a company’s future performance. He valued numbers and raw data, but he knew that numbers were easy to fudge or misread. You had to study the people behind the numbers to get the full story. And reading secondhand profiles about a company’s executives didn’t count.

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Ten years before I came to Houston, it also got into a funny side business when its former owner, Howard Hughes, built a giant ship named the Glomar Explorer and leased it to the CIA to help salvage a wrecked Soviet submarine out in the middle of the Pacific Ocean. Like just about every other energy-related outfit in Texas, Global Marine had gotten very rich during the oil boom. And even though its stock price was at a multiyear low in 1984, around $5, the company still had a lot of assets. Its book value—assets minus liabilities divided by total shares outstanding—was around $10. That meant, by classic value investment standards, GLM was a potential winner. I grabbed my handmade earnings models and proudly strolled into Geoff’s office. “This looks good, Scott,” he said. “Let’s go pay them a visit and see what they have to say.”

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As we drove back on the Katy Freeway toward Texas Commerce’s gleaming headquarters in the distance, Geoff turned to me and said, “Well, what do you think?” I watched the road for a little while, trying to figure out why I was so reluctant to pull the trigger on GLM. It was a classic winner according to the rules of value investing. The share price was half the company’s book value. And Jerry’s presentation had been very persuasive. I’m sure most twenty-five-year-old financial rookies—and even a lot of seasoned money managers—would have left Global Marine’s offices eager to buy into the company. But I just couldn’t. First, even back then, I knew how risky it was to predict the bottom of a downturn.

All About Asset Allocation, Second Edition by Richard Ferri

activist fund / activist shareholder / activist investor, Alan Greenspan, asset allocation, asset-backed security, barriers to entry, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, book value, buy and hold, capital controls, commoditize, commodity trading advisor, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, equity risk premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, intangible asset, inverted yield curve, John Bogle, junk bonds, Long Term Capital Management, low interest rates, managed futures, Mason jar, money market fund, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, stock buybacks, stocks for the long run, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve

As more financial information became available, in part as a result of mandatory SEC reporting, investors became more sophisticated. Researchers created and compared ratios such as price/earnings ratios (P/E ratios) and the P/E to earnings growth. In addition, a company’s market price/book value became a leading dividing line. It was widely believed that earnings and book value ratios gave clues to finding profitable investment opportunities. Stocks with low price/earnings and price/book ratios were considered better values than stocks with high ratios. In 1934, Benjamin Graham and David Dodd wrote guidelines that quantified these ratios in their timeless investment book Security Analysis.

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Morningstar categorizes companies using CHAPTER 6 108 TA B L E 6-3 Variables and Weights Used by Morningstar in Style Analysis Value Factors Growth Factors Price/projected earnings (50.0%) Long-term projected earnings growth (50.0%) Historical earnings growth (12.5%) Sales growth (12.5%) Cash-flow growth (12.5%) Book value growth (12.5%) Price/book (12.5%) Price/sales (12.5%) Price/cash flow (12.5%) Dividend yield (12.5%) a “multifactor” model that consists of five variables. Table 6-3 highlights those five factors. The most influential factors in the equation are the stock’s price compared to its past earnings and price compared to projected earnings.

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The book is still one of the most widely distributed investment classics of all time.2 Not much has changed since Benjamin Graham and David Dodd wrote the book on fundamental investing over 75 years ago. Today, investors still analyze the same fundamental factors and price ratios, and they still look for value using earnings and book value. Granted, there have been some changes in the way people analyze the data and the amount of information available to the public. However, the speed and accuracy of computers has made the analysis hundreds of times faster, even after an increase in the amount of data. As security valuation progressed over the years, analysts and academic researchers began to agree on standard labels for categories of stocks based on styles.

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences by Steven G. Mandis

activist fund / activist shareholder / activist investor, algorithmic trading, Bear Stearns, Berlin Wall, Bob Litterman, bonus culture, book value, BRICs, business process, buy and hold, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, commoditize, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, diversification, eat what you kill, Emanuel Derman, financial innovation, fixed income, friendly fire, Glass-Steagall Act, Goldman Sachs: Vampire Squid, high net worth, housing crisis, junk bonds, London Whale, Long Term Capital Management, merger arbitrage, Myron Scholes, new economy, passive investing, performance metric, proprietary trading, radical decentralization, risk tolerance, Ronald Reagan, Saturday Night Live, Satyajit Das, shareholder value, short selling, sovereign wealth fund, subprime mortgage crisis, systems thinking, The Nature of the Firm, too big to fail, value at risk

Weinberg said, “I always felt there was a terrific risk and still do, that when you start going that way [an IPO] you are going to have one group of partners who are going to take what has been worked on for 127 years and get that two-for-one or three-for-one. Any of us who are partners at the time when you do that don’t deserve it. We let people in at book value, they should go out at book value.”10 While I was at Goldman, one partner privately told me that he felt terrible that an IPO would make him worth more money than the management committee partner who had helped build the firm and helped get him promoted to partner. He estimated that this man, who had worked at the firm for more than twenty years and retired before the IPO, was worth an estimated $20–$40 million, compared with newer partners like him, some of whom had worked at the firm for less than ten years and would be worth more than $50 million.

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In discussions, most IPO opponents expressed the concern that going public could “destroy what makes Goldman Sachs Goldman Sachs.”5 A contemporary report described the process of debating and then postponing the IPO as “a wrenching experience that has bruised the firm.”6 It created tensions between the firm’s active general partners and retired limited partners, between Goldman’s investment bankers and traders, and between Corzine and Paulson.7 The discussion was personal, because people had to consider their own self-interest as well as the interests of the firm.8 Partners screamed and cried during one meeting in what one observer described as a “cathartic experience.”9 Conflict arose between new partners and those who had been at the firm longer and had a much greater stake in the firm and were about to retire. Partners with longer tenure, whose Goldman equity and percentage had gained greatly in value and now would get multiples of their book value, had a greater personal financial incentive to favor an IPO. Some partners were rumored to believe they should be compensated, through the IPO, for staying in 1994, turning the firm around, and taking the risk when others left. But John L. Weinberg said, “I always felt there was a terrific risk and still do, that when you start going that way [an IPO] you are going to have one group of partners who are going to take what has been worked on for 127 years and get that two-for-one or three-for-one.

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He estimated that this man, who had worked at the firm for more than twenty years and retired before the IPO, was worth an estimated $20–$40 million, compared with newer partners like him, some of whom had worked at the firm for less than ten years and would be worth more than $50 million. Understandably, dissatisfaction was greatest among the retired limited partners, and tension between them and the general partners (essentially, Goldman’s controlling owners) became heated. As the IPO was originally structured, limited partners would have received a 25 percent premium over the book value of their equity, whereas general partners would have seen premiums of nearly 300 percent.11 Whitehead predicted a major problem if this inequity were not resolved. Issues related to fairness and compensation were also raised by nonpartners because of Goldman’s long-standing policy of not paying high salaries to the “all-important junior executives—the ones who do the grunt work—holding out instead the brass ring of partnership and its potential for eight-figure incomes.”12 Divisions also arose between the investment bankers and the traders.

Portfolio Design: A Modern Approach to Asset Allocation by R. Marston

asset allocation, Bob Litterman, book value, Bretton Woods, business cycle, capital asset pricing model, capital controls, carried interest, commodity trading advisor, correlation coefficient, currency risk, diversification, diversified portfolio, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, family office, financial engineering, financial innovation, fixed income, German hyperinflation, global macro, high net worth, hiring and firing, housing crisis, income per capita, index fund, inventory management, junk bonds, Long Term Capital Management, low interest rates, managed futures, mortgage debt, Nixon triggered the end of the Bretton Woods system, passive investing, purchasing power parity, risk free rate, risk-adjusted returns, Robert Shiller, Ronald Reagan, Sharpe ratio, Silicon Valley, stocks for the long run, superstar cities, survivorship bias, transaction costs, Vanguard fund

VALUE AND GROWTH INDEXES FOR EARLIER PERIODS Stock market data collected by the University of Chicago’s CRSP data set are available back through 1926. These market data form the basis for the SBBI data set of large and small cap stock returns. To develop value and growth indexes, however, it’s necessary to obtain the book value of common equity from the balance sheets of the firms being studied. The Compustat data set provides this information, but this data set does not have book value data prior to 1963 (and is in any case biased by overweighting larger firms).6 Fama and French have developed indexes for value and growth extending all the way back to 1926. The division between small-cap and large-cap stocks is based on stocks in the NYSE only even though the indexes include stocks from the AMEX and NASDAQ (the latter after 1972).

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The division between small-cap and large-cap stocks is based on stocks in the NYSE only even though the indexes include stocks from the AMEX and NASDAQ (the latter after 1972). The median stock in the NYSE by size is used to split stocks into the two size categories. To extend value and growth indexes back prior to 1963, Fama and French use hand-collected data on book value to rank firms by their book-to-market ratios. Unlike the Russell indexes, therefore, the Fama-French indexes are based only on book value-to-market data. The results reported below are for the indexes defined using the 30 percent of firms with the highest book-tomarket ratios as the value firms and the 30 percent of firms with the lowest book-to-market ratios as the growth firms.

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According to Banz, not only are returns on smallcap stocks higher than those on large-cap stocks, but there is an abnormal excess return when measured against the capital asset pricing model (CAPM) security market line. In a series of widely-cited studies, Fama and French show that the size effect (together with the book value effect to be discussed in the next chapter) is important in explaining stock market returns.2 Researchers established that small-cap stocks had another intriguing feature. Most of the small-cap premium occurs in one month, January. Keim (1983) was among the first studies to document this anomaly.3 Using daily data for the period from 1969 to 1979, Keim showed that more than 50 percent of any small-cap premium is due to January returns and that 50 percent of this January premium is achieved in the first week of trading.

Hedgehogging by Barton Biggs

activist fund / activist shareholder / activist investor, Alan Greenspan, asset allocation, backtesting, barriers to entry, Bear Stearns, Big Tech, book value, Bretton Woods, British Empire, business cycle, buy and hold, diversification, diversified portfolio, eat what you kill, Elliott wave, family office, financial engineering, financial independence, fixed income, full employment, global macro, hiring and firing, index fund, Isaac Newton, job satisfaction, junk bonds, low interest rates, margin call, market bubble, Mary Meeker, Mikhail Gorbachev, new economy, oil shale / tar sands, PalmPilot, paradox of thrift, Paul Samuelson, Ponzi scheme, proprietary trading, random walk, Reminiscences of a Stock Operator, risk free rate, Ronald Reagan, secular stagnation, Sharpe ratio, short selling, Silicon Valley, transaction costs, upwardly mobile, value at risk, Vanguard fund, We are all Keynesians now, zero-sum game, éminence grise

However, value was too slow for his blood; the Trigger needed emotion and momentum in his life. It was hard for him to truly fall in love with a dirty industrial dog just because it was cheap. I remember at the time his telling me, “Value sucks and Ben Graham was a loser. Buying cheap stocks on book value analysis is for small-minded accountants. I miss the adrenaline rush from an up stock or running in the shorts with a tail.”This was sacrilege, because (just in case you don’t know) Benjamin Graham is the god of value investing ccc_biggs_ch05_46-62.qxd 12/7/05 3:06 PM Page 53 The Odyssey of Starting a Hedge Fund 53 and wrote the bible, a book called Security Analysis.

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If so, we had to be close.The U.S. equity market had sunk to just below the lows of the previous summer, and most other markets in the world had broken through their two 2002 bottoms. For the technicians, this was a very bad sign, suggesting a break to lower lows. Strategists on CNBC were raging about the S&P 500 going to 500 (it was then 760), and a serious student of valuation, Andrew Smithers in London, called to say his work on replacement-cost book value showed incontrovertibly that U.S. equities were still 30% too expensive. If we were right, however, and markets were either close to or at a major bottom, then it would be a great time for us to start. The issue was whether at a time like this we could raise any significant money other than our own.With a fourth down year for equity markets looming, the mood of the Morgan Stanley brokers was gloomy.

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He was short the dollar by a factor of three times his equity, and he had more than 100% of his equity in Japan, half in the banks, and half in the Japan Topic Index. In addition, he had 200% of his equity in two-year U.S. Treasury notes as an insurance position. Sometimes he also owns a few exotic positions; like right now, he owns a significant interest in a North Korean bank and commercial real estate in St. Petersburg. The bank sells at a third of book value and the real estate yields 15%. He travels continually. He is a very curious, inquisitive man. He operates almost like a secret agent. For example,Tim has big positions in Russian and Japanese banks. He isn’t just content with the usual fare of company meetings and government officials in Moscow and St.

Big Data: A Revolution That Will Transform How We Live, Work, and Think by Viktor Mayer-Schonberger, Kenneth Cukier

23andMe, Affordable Care Act / Obamacare, airport security, Apollo 11, barriers to entry, Berlin Wall, big data - Walmart - Pop Tarts, Black Swan, book scanning, book value, business intelligence, business process, call centre, cloud computing, computer age, correlation does not imply causation, dark matter, data science, double entry bookkeeping, Eratosthenes, Erik Brynjolfsson, game design, hype cycle, IBM and the Holocaust, index card, informal economy, intangible asset, Internet of things, invention of the printing press, Jeff Bezos, Joi Ito, lifelogging, Louis Pasteur, machine readable, machine translation, Marc Benioff, Mark Zuckerberg, Max Levchin, Menlo Park, Moneyball by Michael Lewis explains big data, Nate Silver, natural language processing, Netflix Prize, Network effects, obamacare, optical character recognition, PageRank, paypal mafia, performance metric, Peter Thiel, Plato's cave, post-materialism, random walk, recommendation engine, Salesforce, self-driving car, sentiment analysis, Silicon Valley, Silicon Valley startup, smart grid, smart meter, social graph, sparse data, speech recognition, Steve Jobs, Steven Levy, systematic bias, the scientific method, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Davenport, Turing test, vertical integration, Watson beat the top human players on Jeopardy!

How to explain the vast divergence between Facebook’s worth under accounting standards ($6.3 billion) and what the market initially valued it at ($104 billion)? There is no good way to do so. Rather, there is widespread agreement that the current method of determining corporate worth, by looking at a company’s “book value” (that is, mostly, the worth of its cash and physical assets), no longer adequately reflects the true value. In fact, the gap between book value and “market value”—what the company would fetch on the stock market or if it were bought outright—has been growing for decades. The U.S. Senate even held hearings in the year 2000 about modernizing the financial reporting rules, which emerged in the 1930s when information-based businesses scarcely existed.

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(That, by way of comparison, was roughly the market capitalizations of Boeing, General Motors, and Dell Computers combined.) What was Facebook actually worth? In its audited financial accounts for 2011, with which investors sized up the company, Facebook reported assets of $6.3 billion. That represented the value of its computer hardware, office equipment, and other physical stuff. As for the book value placed on the vast stores of information that Facebook held in its corporate vault? Basically zero. It wasn’t included, even though the company is almost nothing but data. The situation gets odder. Doug Laney, vice president of research at Gartner, a market research firm, crunched the numbers during the period before the initial public offering (IPO) and reckoned that Facebook had collected 2.1 trillion pieces of “monetizable content” between 2009 and 2011, such as “likes,” posted material, and comments.

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Senate even held hearings in the year 2000 about modernizing the financial reporting rules, which emerged in the 1930s when information-based businesses scarcely existed. The issue affects more than just a company’s balance sheet: the inability to properly value corporate worth arguably produces business risk and market volatility. The difference between a company’s book value and its market value is accounted for as “intangible assets.” It has grown from around 40 percent of the value of publicly traded companies in the United States in the mid-1980s to three-fourths of their value at the dawn of the new millennium. This is a hefty divergence. These intangible assets are considered to include brand, talent, and strategy—anything that’s not physical and part of the formal financial-accounting system.

The Bank That Lived a Little: Barclays in the Age of the Very Free Market by Philip Augar

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Bonfire of the Vanities, bonus culture, book value, break the buck, business logic, call centre, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, family office, financial deregulation, financial innovation, fixed income, foreign exchange controls, Glass-Steagall Act, high net worth, hiring and firing, index card, index fund, interest rate derivative, light touch regulation, loadsamoney, Long Term Capital Management, long term incentive plan, low interest rates, Martin Wolf, money market fund, moral hazard, Nick Leeson, Northern Rock, offshore financial centre, old-boy network, out of africa, prediction markets, proprietary trading, quantitative easing, risk free rate, Ronald Reagan, shareholder value, short selling, Sloane Ranger, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, too big to fail, vertical integration, wikimedia commons, yield curve

These actions, Jenkins said, produced a rise of 3 percentage points in Barclays’ tier one equity ratio since 2012, significantly lower leverage, a more focused business model and an improving reputation. Despite this progress, Jenkins’ note continued, the bank’s returns were not good enough to please shareholders. Barclays’ return on equity was poor and remained below the cost of equity. As a result, the share price was far below the book value of each share. Many banks at the time experienced this same problem but Barclays’ discount to book value was more than that of many of its peers. Wherever the bank operated, Jenkins said, returns were being squeezed by the demands of regulators. In the UK, the ringfence between the retail and investment banks would increase costs from 2019 onwards.

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The British and American economies were shrinking, interest rates were being cut, governments were trying everything they could to stimulate business and consumer spending but investors were convinced a recession was imminent. The FTSE 100 index closed 2008 31 per cent down over the year, its biggest ever annual fall. But ‘the Thinker’ believed that the markdown had been indiscriminate and that some good companies had been overlooked – Barclays, for example. The share price was trading at a third of book value, half the level of other UK banks, and even below the US banks, which he thought included some real basket cases. Was Barclays really the worst bank in its peer group? William did not think so and that meant that either Barclays was underpriced or the rest were overvalued. He switched on his computer and began to work out which.

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Too much would damage the investment bank’s revenue potential, too little would leave Barclays over-invested in what was now a low return business. Jenkins formed a small team in head office, the Stealth Group, to look at this question. Its conclusions were startling. They believed that the investment bank was the reason Barclays’ shares were trading at less than half book value – the bank’s assets minus the liabilities spread across the number of shares in issue – and that Barclays would never cover the cost of its equity while it retained an investment bank. In 2010, Barclays Capital used £200 billion of risk weighted assets; Project Electra had cut this to £120 billion, but the Stealth Group believed that a further cut to £60 billion was required to bring the risk weighted returns up to acceptable levels.

The Quants by Scott Patterson

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, automated trading system, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, book value, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Carl Icahn, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Dr. Strangelove, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, Financial Modelers Manifesto, fixed income, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, Jim Simons, job automation, John Meriwether, John Nash: game theory, junk bonds, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, Mark Spitznagel, merger arbitrage, Michael Milken, military-industrial complex, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Robert Mercer, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Savings and loan crisis, Sergey Aleynikov, short selling, short squeeze, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

The surprising answer, they discovered, was yes. The value and momentum anomalies in stocks they’d studied in academia could actually work for entire countries. It was a monumental leap. They would measure a country’s stock market, divide that by the sum of the book value of each company in that market, and get a price-to-book value for the entire country. If Japan had a price-to-book value of 1.0 and France had a price-to-book of 2.0, that meant Japan was cheap relative to France. The investing process from there was fairly easy: long Japan, short France. The applications of this insight were virtually endless. Just as it didn’t matter whether a company made widgets or tanks, or whether its leaders were visionaries or buffoons, the specifics of a country’s politics, leadership, or natural resources had only a tangential bearing on the view from a quant trader’s desk.

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IBM is big: it has a market cap of about $150 billion. Krispy Kreme Doughnuts is small, with a market cap of about $150 million. Other factors, such as how many employees a company has and how profitable it is, also matter. Value is generally determined by comparing a company’s share price to its book value, a measure of a firm’s net worth (assets, such as the buildings and/or machines it owns, minus liabilities, or debts). Price-to-book is the favored metric of old-school investors such as Warren Buffett. The quants, however, use it in ways the Buffetts of the world never dreamed of (and would never have wanted to), plugging decades of data from the CRSP database into computers, pumping it through complex algorithms, and combing through the results like gold miners sifting for gleaming nuggets—flawed coins with hidden discrepancies.

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Fama and French unearthed one of the biggest, shiniest nuggets of all. The family tree of “value” has two primary offspring: growth stocks and value stocks. Growth stocks are relatively pricey, indicating that investors love the company and have driven the shares higher. Value stocks have a low price-to-book value, indicating that they are relatively unloved on Wall Street. Value stocks, in other words, appear cheap. Fama and French’s prime discovery was that value stocks performed better than growth stocks over almost any time horizon going back to 1963. If you put money in value stocks, you made slightly more than you would have if you invested in growth stocks.

Toward Rational Exuberance: The Evolution of the Modern Stock Market by B. Mark Smith

Alan Greenspan, bank run, banking crisis, book value, business climate, business cycle, buy and hold, capital asset pricing model, compound rate of return, computerized trading, Cornelius Vanderbilt, credit crunch, cuban missile crisis, discounted cash flows, diversified portfolio, Donald Trump, equity risk premium, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, full employment, Glass-Steagall Act, income inequality, index arbitrage, index fund, joint-stock company, junk bonds, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market clearing, merger arbitrage, Michael Milken, money market fund, Myron Scholes, Paul Samuelson, price stability, prudent man rule, random walk, Richard Thaler, risk free rate, risk tolerance, Robert Bork, Robert Shiller, Ronald Reagan, scientific management, shareholder value, short selling, stocks for the long run, the market place, transaction costs

Graham and Dodd argued that a securities analyst should seek to determine the “intrinsic value” of a given stock, which was often very different from the current market price of that stock. However, they specifically rejected the concept of “intrinsic value” commonly employed in the early years of the century, defined as the book value of a company’s shares (assets per share minus liabilities per share), admitting that time had shown that book value had no connection to corporate earnings or stock prices. To Graham and Dodd, a stock’s “intrinsic value” was “that value that was justified by the facts, e.g., the assets, earnings, dividends [and] definitive prospects” of a company, “not capitalization of entirely conjectural future profits.”

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One of the most significant findings appearing to undermine the notion of market efficiency was published in 1992 by Eugene Fama himself.10 Fama and a colleague found that both book-to-market ratios and the size of a company could be used to predict future returns. (The “book” value of a company is the value of its assets minus its liabilities. The book-to-market ratio is simply book value per share divided by the market price per share of the stock.) Stocks in companies with low book-to-market ratios tended to outperform other stocks, and smaller stocks tended to outperform larger stocks, adjusted for beta risk. On the face of it, this result seemed to flat-out contradict Fama’s notion of market efficiency.

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Steel had a broader significance, reflecting the first inklings of changing standards for valuing stocks. Those critics who alleged that a substantial quantity of water existed in the new trust were in a way correct, given the essentially static analysis prevalent at the time. It was customary to speak in terms of a company’s “intrinsic” worth, usually defined as its “book value”—the total of assets minus liabilities. The Federal Commissioner of Corporations, later looking back on the birth of U.S. Steel, made use of the traditional valuation approach in attempting to calculate the true worth of the corporation at the time of its formation. Adding together the values of its constituent parts, he calculated that U.S.

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms by Russell Napier

Alan Greenspan, Albert Einstein, asset allocation, banking crisis, Bear Stearns, behavioural economics, book value, Bretton Woods, business cycle, buy and hold, collective bargaining, Columbine, cuban missile crisis, desegregation, diversified portfolio, fake news, financial engineering, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, global macro, hindsight bias, Kickstarter, Long Term Capital Management, low interest rates, market bubble, Michael Milken, military-industrial complex, Money creation, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, price stability, reserve currency, risk free rate, Robert Gordon, Robert Shiller, Ronald Reagan, short selling, stocks for the long run, yield curve, Yogi Berra

Stocks also crashed through all previously accepted limits imposed by considerations of book value. Helpfully, the Wall Street Journal provided a table comparing price-to-book and price-to-working capital ratios for 21 of the 30 Dow Jones Industrial Average stocks on 18 May 1932, with comparison to the low prices of 1921. FIGURE 56. KEY DJIA MEMBERS – PRICE TO BOOK AND PRICE TO WORKING CAPITAL Source: Wall Street Journal, 19 May 1932. Note: The 1932 and 1921 low prices for the 21 stocks are shown in percentages of book value, excluding intangibles, and of equities in working capital, after deducting full par value of all prior obligations.

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In relation to this book I would like to acknowledge the assistance of four of the course author/ teachers in particular: Michael Oliver, Gordon Pepper, Andrew Smithers and Stephen Wright. Michael and Gordon have done their best to steer me through the minefield of monetary data interpretation necessary in this book. Andrew and Stephen have been kind enough to allow me to quote from their book, Valuing Wall Street. Any errors which may appear in these pages on the subject of q ratios or money are those of the student rather than the teacher. For those who also wish to learn from the teachers please come and join us on the Practical History of Financial Markets course, buy a copy of Valuing Wall Street or Gordon Pepper’s The Liquidity Theory of Asset Prices.

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The last of the Waldorf crowd, which had been persistently bearish on the market, was driven in. 12 September: During the current week thousands of shares of the better class of industrial and railroad stocks have been absorbed by large interests who are convinced that, with the inevitable reactions, the tendency of business as well as security markets, will be upward… The advance this week is undoubtedly due to an improvement in general business conditions…The bear crowd has been given one of the worst beatings in the history of Wall Street… Many brokerage houses who advised profit taking are now convinced by the action of the market that the rise is anything but a flurry engineered by professional operators. 14 September: ‘As to the security market, the capitalizations of many concerns are today selling below net current assets over current liabilities. The shares of many corporations are selling at one-third of their respective book values. Security prices like these are too attractive to exist for any great length of time. Already we hear that the textile, shoe and many other industries are rapidly getting back to normal.’ [William Boyce Thompson, mining entrepreneur and former director of the Federal Reserve Bank of New York.] 14 September: Outside of a handful of stocks, however there was little interest shown in the market and it was evident that the recent rise had not encouraged public participation. 16 September: Already the floating supply has been reduced and it may well be that in six months’ time we shall be saying that there are not enough stocks to go around.

The Power Law: Venture Capital and the Making of the New Future by Sebastian Mallaby

"Susan Fowler" uber, 23andMe, 90 percent rule, Adam Neumann (WeWork), adjacent possible, Airbnb, Apple II, barriers to entry, Ben Horowitz, Benchmark Capital, Big Tech, bike sharing, Black Lives Matter, Blitzscaling, Bob Noyce, book value, business process, charter city, Chuck Templeton: OpenTable:, Clayton Christensen, clean tech, cloud computing, cognitive bias, collapse of Lehman Brothers, Colonization of Mars, computer vision, coronavirus, corporate governance, COVID-19, cryptocurrency, deal flow, Didi Chuxing, digital map, discounted cash flows, disruptive innovation, Donald Trump, Douglas Engelbart, driverless car, Dutch auction, Dynabook, Elon Musk, Fairchild Semiconductor, fake news, family office, financial engineering, future of work, game design, George Gilder, Greyball, guns versus butter model, Hacker Ethic, Henry Singleton, hiring and firing, Hyperloop, income inequality, industrial cluster, intangible asset, iterative process, Jeff Bezos, John Markoff, junk bonds, Kickstarter, knowledge economy, lateral thinking, liberal capitalism, Louis Pasteur, low interest rates, Lyft, Marc Andreessen, Mark Zuckerberg, market bubble, Marshall McLuhan, Mary Meeker, Masayoshi Son, Max Levchin, Metcalfe’s law, Michael Milken, microdosing, military-industrial complex, Mitch Kapor, mortgage debt, move fast and break things, Network effects, oil shock, PalmPilot, pattern recognition, Paul Graham, paypal mafia, Peter Thiel, plant based meat, plutocrats, power law, pre–internet, price mechanism, price stability, proprietary trading, prudent man rule, quantitative easing, radical decentralization, Recombinant DNA, remote working, ride hailing / ride sharing, risk tolerance, risk/return, Robert Metcalfe, ROLM, rolodex, Ronald Coase, Salesforce, Sam Altman, Sand Hill Road, self-driving car, shareholder value, side project, Silicon Valley, Silicon Valley startup, Skype, smart grid, SoftBank, software is eating the world, sovereign wealth fund, Startup school, Steve Jobs, Steve Wozniak, Steven Levy, super pumped, superconnector, survivorship bias, tech worker, Teledyne, the long tail, the new new thing, the strength of weak ties, TikTok, Travis Kalanick, two and twenty, Uber and Lyft, Uber for X, uber lyft, urban decay, UUNET, vertical integration, Vilfredo Pareto, Vision Fund, wealth creators, WeWork, William Shockley: the traitorous eight, Y Combinator, Zenefits

The central principle of the venture business, Davis once explained boldly, could be summed up in four words: “Back the Right People.”[28] For his part, Rock made a habit of skipping over the financial projections in business plans and flipping to the back, where the founders’ résumés were presented.[29] “The single most important factor in the long run for any company is, of course, management,” Rock told the Harvard Business School Club of San Francisco in 1962. “However, I believe that in the applied science industry this is especially true.” The only asset of tech startups, and the only possible reason to invest in them, was human talent, or what Rock liked to call “intellectual book value.” “If you are buying intellectual book value, then you’d better place a great deal of emphasis on the people who you hope will capitalize on their intellect,” Rock lectured.[30] Unlike later venture capitalists, many of whom were engineers by background, Davis and Rock lacked the training necessary to evaluate the technical ideas of founders.[31] They made up for this deficiency by seeking advice from their fund’s limited partners, several of whom were running scientific startups.

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., 82 BlackBerry, 331 Black Lives Matter, 385 “blitzscaling,” 357, 362, 364, 385–88 Blue Box, 110–11 Bochner, Steve, 329 Boeing, 12, 395 Bohemian Grove, 92 Bolger, John, 116 Bonderman, David, 358, 360, 362–63, 367 Bono, 19, 20 “book value,” 47. See also “intellectual book value” “bootstrapped,” 325 Bosack, Leonard, 109–19 background of, 109–10 founding of Cisco, 111–12 Sequoia Capital’s investment, 113–19 Boston, 18, 25, 94–95, 98–99, 109, 391 Botha, Roelof, 305–14, 326 application of behavioral science to venture capital, 309–11 background of, 305–6 Facebook investment, 194–96, 444n Stripe investment, 319–20 WhatsApp investment, 307–8, 314 Xoom investment, 306, 313 YouTube investment, 306–7, 309–10 Boulevard of Broken Dreams (Lerner), 397 Boyer, Herbert, 73–78 Breyer, Jim, 258–61, 306 Brin, Sergey, 173–76, 178–91, 290.

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Judgments about technology startups would “come from either ‘the seat of the pants’ or the ‘top of the hat,’” as Rock once wrote to Davis.[27] Quantitative investment metrics such as the price-earnings ratio would be irrelevant, because the most promising ventures were likely to have no earnings whatever at the point when they sought capital. Likewise, they would lack the physical assets—the buildings, machines, inventory, and vehicles—that constituted “book value” at mature companies: thus another standard metric used in public markets would be meaningless. In sum, venture capitalists would have to bet on startups without the reassuring yardsticks used by other financiers. They would have no choice but to practice finance without finance. Having discarded conventional investment metrics, the partners needed something else to go by.

After the New Economy: The Binge . . . And the Hangover That Won't Go Away by Doug Henwood

"World Economic Forum" Davos, accounting loophole / creative accounting, affirmative action, Alan Greenspan, AOL-Time Warner, Asian financial crisis, barriers to entry, Benchmark Capital, book value, borderless world, Branko Milanovic, Bretton Woods, business cycle, California energy crisis, capital controls, corporate governance, corporate raider, correlation coefficient, credit crunch, deindustrialization, dematerialisation, deskilling, digital divide, electricity market, emotional labour, ending welfare as we know it, feminist movement, fulfillment center, full employment, gender pay gap, George Gilder, glass ceiling, Glass-Steagall Act, Gordon Gekko, government statistician, greed is good, half of the world's population has never made a phone call, income inequality, indoor plumbing, intangible asset, Internet Archive, job satisfaction, joint-stock company, Kevin Kelly, labor-force participation, Larry Ellison, liquidationism / Banker’s doctrine / the Treasury view, low interest rates, manufacturing employment, Mary Meeker, means of production, Michael Milken, minimum wage unemployment, Naomi Klein, new economy, occupational segregation, PalmPilot, pets.com, post-work, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rewilding, Robert Gordon, Robert Shiller, Robert Solow, rolling blackouts, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, statistical model, stock buybacks, structural adjustment programs, tech worker, Telecommunications Act of 1996, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, total factor productivity, union organizing, War on Poverty, warehouse automation, women in the workforce, working poor, zero-sum game

Not to pick on Lev— Novelty 21 1207or market to book ratio, 100% nonfinancial corporations, 1945-2002 though he's an irresistible target—but the relation is nicely illustrated by his claim (Lev 2000) that since the market value of the companies in the Standard & Poor's 500 index was 6.25 the firms' book value,'" "in the U.S., know^ledge assets account for six (!) of every seven dollars of corporate market value" (exclamation point in original). So, you see, knov^ledge assets drive the New Economy. How do we know this? Because the stock market tells us so. How do we know the stock market is right? Well, it just is.

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In the meantime, selling shareholders and employees exercising stock options lose when the stock is undervalued, and new stock issued into an underpriced market dilutes shareholders' equity." If the revenues and earnings don't materialize, and thereby justify the 2% pop, then that's a kind of mispricing, but it's much more fun than waiting years! 10. Book value equals the sum of the value of a firm's physical and financial assets less its debts and other Habilities. 11. SpecificaUy, the numbers come fiiom the Fed's flow of funds accounts—market value of equity divided by value of assets, both for nonfinancial corporations. 12. He also included with it an email from his editor, who burbled that she hadn't done much with it "since it's simply wonderfril :-)" [emoticon in original]. 13.

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Lee, 100 Balboa, Rocky, 198 Balibar, Etienne, 172-173, 239 bankruptcy, not in economists' models, 193 Barlow, Maude, 162 Bartiromo, Maria, 189-190 Baudrillard,Jean, 26 Becker, Gary, 94, 97 BeUo,Walden, 185 benefits, targeting of, 141-142 Berle,Adolph,212,213 bibhometrics "globahzarion," 145—146 "New Economy," 4 biotechnology, pubUc subsidy, 6 Biotic Baking Brigade, 239 birth weight, 81 Blodget, Henry, 195 Boesky, Ivan, 214 Bono, 177 book value, 232 border cultures, 172 Brady bonds, 221 brands, 17,18-19 Brand DNA, 18 Bretton Woods, 219 brokers productivity of, 64-66 salaries, 202 Brown & Co., 187 Buchanan, Pat, 151,173, 239 Burbach, Roger, 175 business, trust in, 32 Business Week cheerleading 1960s, 7-8 1990s, 32 New Economy poll, 31—32 California electricity crisis, 34,200 Silicon Valley income distribution, 105 Index California Public Employees Retirement System, 214 capital, measuring, 57 capitalism collective (Berle),213 as international, 167 periodizing, 175-176 capital account liberalization, 218 capital flight, 220 capital gains, 89,203 Cappelli, Peter, 76 caring professions, discrimination and, 96 Carrying Capacity Network, 162 Casarini, Luca, 160 Casey Bill, 232 Castells, Manuel, 26,147 Catholic social teaching, 140 Cavanagh,John, 162 cellular phone industry, 198 Center on Budget and Policy Priorities, 89-90 central banks.

Good Profit: How Creating Value for Others Built One of the World's Most Successful Companies by Charles de Ganahl Koch

Abraham Maslow, Albert Einstein, big-box store, book value, British Empire, business process, commoditize, creative destruction, disruptive innovation, do well by doing good, Garrett Hardin, global supply chain, hiring and firing, income per capita, Internet of things, invisible hand, Isaac Newton, Joseph Schumpeter, low interest rates, oil shale / tar sands, personalized medicine, principal–agent problem, proprietary trading, Ralph Waldo Emerson, risk tolerance, Salesforce, Solyndra, tacit knowledge, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transaction costs, transfer pricing

We satisfy the customer’s desire whenever we have the capability to do so, and the customer confirms that value by allowing us to profit. And there is much more value creation to come from Koch in the future. In 2007, I explained our management framework in a book called The Science of Success. When I wrote it, the book value of Koch Industries (adjusted for distributions) was about two thousand times greater than in 1961 when I returned home to Wichita, Kansas, to work for my father. As I mentioned earlier, the adjusted book value is now five thousand times greater. Even during the Great Recession of 2008 and its aftermath (one of the worst economic periods since the Great Depression), Koch Industries more than doubled its shareholders’ equity and increased its workforce by more than 40 percent.

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This framework has enabled Koch to grow tremendously; indeed, it was essential to turning a company valued at $21 million in 1961 into one valued at $100 billion in 2014. (This $100 billion figure is derived from Forbes’s estimate of my brother David’s net worth and my net worth.) As shown on the next page, an investment of $1,000 in our company in 1960 would have a book value of $5 million today (assuming reinvestment of distributions)—a return 27 times higher than what a similar investment in the S&P 500 would have achieved. It is worth noting that our rapid growth in value has continued even as we have grown into a large organization with more than 100,000 employees.

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Ike Moore, the former head of sales for Wood River, had worked for Sinclair ever since it bought the Wood River refinery in 1950. Moore knew that Fred had a desire to get back into the refining business, so when Sinclair Oil decided to sell its share in Great Northern, Ike let Fred know of the opportunity. My father ended up buying Sinclair’s interest, sight unseen, at book value: $5 million. His instincts and judgment proved right. At the time (February 1959), Pine Bend was running about 35,000 barrels per day, a little more than one-tenth of its capacity today. That summer, Wood River Oil and Refining Co., Inc., changed its name to Rock Island Oil and Refining Co., Inc.

The New Enclosure: The Appropriation of Public Land in Neoliberal Britain by Brett Christophers

Alan Greenspan, book value, Boris Johnson, Capital in the Twenty-First Century by Thomas Piketty, Corn Laws, credit crunch, cross-subsidies, Diane Coyle, estate planning, Garrett Hardin, gentrification, ghettoisation, Hernando de Soto, housing crisis, income inequality, invisible hand, Jeremy Corbyn, land bank, land reform, land tenure, land value tax, late capitalism, market clearing, Martin Wolf, New Journalism, New Urbanism, off grid, offshore financial centre, performance metric, Philip Mirowski, price mechanism, price stability, profit motive, radical decentralization, Right to Buy, Skype, sovereign wealth fund, special economic zone, the built environment, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tragedy of the Commons, Tyler Cowen, urban sprawl, wealth creators

Under cash accounting, it is often only cash holdings that appear on the assets side of the balance sheet – land, property and other fixed assets are generally excluded. Furthermore, any non-cash assets that do appear are usually shown at ‘book value’ (the historical price paid for a particular asset) or are simply accorded a nominal value. Under accrual accounting, however, all assets are recognized, including land and buildings – and they are recorded not at book value, but at market value, ‘fair value’ or value in use, explicitly factoring in historic depreciation. The technicalities of different accounting systems may seem obscure, dry and irrelevant to the tangible politics and economics of public-land privatization, but in fact that’s not the case.

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Critics have complained, however, that the privatization seriously undervalued this land – one site, for instance, achieved a sale price of £193 million, but was valued in the privatization prospectus at just £29 million. The Mirror newspaper raged about a ‘565% mark-up’, adding its voice to that of those who said Royal Mail and its land had been sold on the cheap.1 But the prospectus valuation was a net book value, not a market value – it was based on cash accounting, not accruals accounting. The Mirror, wittingly or otherwise, was comparing apples and oranges. Would the use of accrual accounting in the prospectus have helped the government secure a higher price for Royal Mail at privatization? Maybe, but maybe not.

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With neat if uncomfortable symmetry, the remaining NHS estate has once again, just in the past eighteen months, been the subject of an influential, shrinkage-oriented investigation – this time by Sir Robert Naylor.1 His advisers, the consultants Deloitte, told him and the government that the market value of the estate is likely to be between £9 billion and £17 billion (compared to its book value of around £6 billion), and they believe some 1,300 hectares of land could be released from the acute estate alone, which spans around 3,500 hectares.2 In the run-up to the June 2017 general election, the prime minister, Theresa May, said in a television interview that she was enthusiastically backing the Naylor Report’s proposals.3 And soon the implications were evident – in August, it was reported that the Department of Health had ‘quietly doubled the amount of land it intends to dispose of’, a significant proportion of which is currently in use ‘for clinical or medical purposes’.4 Alongside widespread, ongoing actual de jure land privatization, moreover, there are today increasing signs of a trend towards forms of creeping – even insidious – de facto privatization: ‘sale’ of public land that potentially avoids scrutiny because it is not ‘real’ sale.

The Accidental Investment Banker: Inside the Decade That Transformed Wall Street by Jonathan A. Knee

AOL-Time Warner, barriers to entry, Bear Stearns, book value, Boycotts of Israel, business logic, call centre, cognitive dissonance, commoditize, corporate governance, Corrections Corporation of America, deal flow, discounted cash flows, fear of failure, fixed income, Glass-Steagall Act, greed is good, if you build it, they will come, iterative process, junk bonds, low interest rates, market bubble, market clearing, Mary Meeker, Menlo Park, Michael Milken, new economy, Ponzi scheme, pre–internet, proprietary trading, risk/return, Ronald Reagan, shareholder value, Silicon Valley, SoftBank, technology bubble, young professional, éminence grise

Now, the prospective Goldman IPO looked like it would provide existing equity holders with as much as five times book value. Although the “limiteds” knew they were not entitled to the same value for their stakes as continuing partners, they wanted some kind of financial “kiss” for their contribution to positioning Goldman to command such a value in the public markets. And the last thing the current partners wanted was the legendary bankers from Goldman’s past picketing the NYSE on the day of the listing with signs saying “Goldman Unfair to Seniors.”6 To avoid any such unpleasantness, Corzine agreed, after much negotiation, to guarantee the limiteds a payout of two times book value. Second, just before the vote, in an embarrassingly public display of apparent quid pro quo, Corzine announced that Hank Paulson would move from being his number two to being his co-CEO.

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Corzine knew he had the votes when the Executive Committee announced publicly in June that they were proceeding with the IPO. But then something happened that any IPO underwriter warns his client about. The markets turned south. Well before the announced date for the IPO, it became clear that achieving five times book value was out of the question. Then four times looked unrealistic. Then three times. Then it looked like the limiteds, with their guaranteed payout of two times book value, might make more than the continuing partners. The IPO was pulled in September 1998, indefinitely. Corzine was badly weakened by these events. How could the head of Goldman Sachs have agreed to a fixed price for the limiteds while everyone else was taking market risk, many asked?

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In the battle that ensued, Corzine’s need to secure the IPO’s approval by the partnership led him to agree to two things that precipitated his downfall. The first was the deal he made with the “limited partners.” When a Goldman partner retired he “went limited” and slowly withdrew his capital based on a pre-agreed formula based on the book value of his holdings over a number of years. Relations with these senior members of the firm who had formally retired from the partnership but nonetheless still had a significant amount of continuing equity in the enterprise was always a sensitive topic. Many of the previous private banking partnerships had not survived precisely because of their failure to establish such a mechanism for the gradual withdrawal of capital.

Beat the Market by Edward Thorp

beat the dealer, book value, buy and hold, compound rate of return, Edward Thorp, margin call, Paul Samuelson, RAND corporation, short selling, short squeeze, transaction costs

And again, some judgments were made about the probable future course of the common stock. I told my brother the crash of May–June 1962 might develop into a disaster similar to 1929. It was necessary to estimate the worst calamity that might overtake Sperry in the ensuing five years. This company, vital to our national defense, had book value of about $10 a share. (Book value is a rough indication of the value of the assets of a company, less its debts.) I estimated that in the event of a true disaster, the common would not decline below 6, less than half its current price. It was difficult to put a ceiling on how high the common might move in five years.

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., 16, 29 Automobile Banking, 202 Avalanche effect, 36, 37fn, 39, 41-42, 199-201 used in Bunker-Ramo warrants, 64 Axes, 21 Banning of short sales, 73, 74, 138 139 in Moly warrants, 61 Bar graph, 20 choosing candidates, 77-79, 160-161 compared with only buying common, 96-97 compared with only shorting warrants, 96-97 definition, 43-49 performance, 93-94, 99-102 204-209 possible size of investment, 196-198 simplified mechanical strategy, 91-97 with latent warrants, 155-161 with options, 163-167 Bean, Dr. Tom, 194 Bear market, 33 Beckham, Colonel, 194 Bid and asked prices, 104 Blough, Roger, 55 Blue chip, 33-34 Blue Monday, 56 Bonds, bank financing, 147-148 choosing bond situations, 150-161 commissions, 183 convertible, 141-161 prices, how quoted, 147fn Book value, 66 Brahe, Tycho, 191 Bramalea Consolidated, 202 British American Con., 202 Brokerage account, 169-179 cash account, 169-170 margin account, 170-174 mixed account, 64, 178-179 restricted account, 173 short account, 174-178 Bruce, E. L., 60 Bull market, 33 Bunker-Ramo, 62, 65, 93, 132 Burns, Arthur F., 14 Buy-in, 58, 105 Buying on margin, 39 Buying power, 40, 135, 178 definition, 173 Cage room, 57 Calls, 141-142, 161 definition, 162 with basic system, 163-167 Canad.

Shortchanged: Life and Debt in the Fringe Economy by Howard Karger

Alan Greenspan, big-box store, blue-collar work, book value, corporate social responsibility, credit crunch, delayed gratification, financial deregulation, fixed income, illegal immigration, independent contractor, labor-force participation, late fees, London Interbank Offered Rate, low interest rates, low skilled workers, microcredit, mortgage debt, negative equity, New Journalism, New Urbanism, offshore financial centre, payday loans, predatory finance, race to the bottom, Silicon Valley, Telecommunications Act of 1996, telemarketer, underbanked, working poor

Vehicles with branded titles are ineligible for traditional financing and extended warranties, are more expensive to insure, and are not eligible for manufacturer warranties or recalls. Regardless of their condition, branded-title vehicles are considered “junk” by insurers, state motor vehicle bureaus, and car manufacturers. As a result, they’re worth only a fraction of their book value.148 In one independent car lot I came across a six-year-old Acura with 70,000 miles on it. The retail blue book value (in excellent condition with a clean title) of the car was $8,000, or what the dealer was asking for it. When I inquired about the title, the salesperson said he didn’t have it but he could get it. The car was in good shape and drove well.

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Some pawnshops allow customers to extend the loan indefinitely by paying only the interest. As one pawnshop manager put it, “It’s not unusual for customers to renew their loans for a year or more.” The pawnshop loan is typically about 33%–50% of what a broker expects to receive if he or she sells the item.4 Appraisals are low—jewelry appraises at wholesale value, guns at 60% of blue book value, and appliances at 10%–30% or less of their original cost. Mary Bradley’s sister, Lucy, is a recovering drug addict who, like many addicts, frequently stole money and “pawnable” goods from her family. Since Mary’s family was wealthy, the pickings were good. Mary got to know pawnshops well, because after things disappeared, she and her mother regularly visited them to recover their missing goods.

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It has 30-40 cars at any given time, it’s located on a wide Texas highway, and its sales office is in a small prefab building. Its stock consists mainly of high-mileage vehicles bought at auction, at least six years old, and of little interest to most fran-chised car dealers. Sunshine purchases its vehicles well below book value, rarely paying more than $2,000 for any car. The minor reconditioning generally costs less than $300. Sunshine’s strategy is to sell a lot of $5,000–$8,000 cars fast.159 A big sign painted with a cheery sun sits in front of its lot. In prominent letters the sign advertises that Sunshine will “tote-the-note” and provide in-house financing.

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

Alan Greenspan, asset allocation, behavioural economics, book value, Bretton Woods, British Empire, business cycle, butter production in bangladesh, buy and hold, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial engineering, financial independence, financial innovation, fixed income, George Santayana, German hyperinflation, Glass-Steagall Act, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Bogle, John Harrison: Longitude, junk bonds, Long Term Capital Management, loss aversion, low interest rates, market bubble, mental accounting, money market fund, mortgage debt, new economy, pattern recognition, Paul Samuelson, Performance of Mutual Funds in the Period, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Savings and loan crisis, South Sea Bubble, stock buybacks, stocks for the long run, stocks for the long term, survivorship bias, Teledyne, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

Although tame by today’s standards, in the depths of the depression, recommending any stock ownership at all was a startling piece of advice. What did the market look like in 1932? Prices were so low that the dividend yield was nearly 10%, and remained above 6% for more than a decade. Almost all stocks sold for less than their “book value” (roughly, the total value of their assets), and fully one-third of all stocks sold for less than one-tenth of their book value! (By comparison, today, the average S&P 500 stock sells at about six times book value.) In short, stocks could not be given away, even at these prices. Anyone paying good money for them was considered certifiable. The aftermath of the Nifty Fifty and the bear market of 1973–1974 is equally instructive.

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Even the most diehard efficient market proponent cannot fail to be impressed with their track records and bestow on them that rarest of financial adjectives—“skilled.” First, a look at the data. Of the two, Buffett’s record is clearly the most impressive. From the beginning of 1965 to year-end 2000, the book value of his operating company, Berkshire Hathaway, has compounded at 23.6% annually versus 11.8% for the S&P 500. The actual return of Berkshire stock was, in fact, slightly greater. This is truly an astonishing performance. Someone who invested $10,000 with Buffett in 1964 would have more than $2 million today.

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And, yes, there’s a fund tracking this microcap index, although it isn’t available to the general public. Figure 13-1. The four corners of the market. How do you draw the line between a value company and a growth company? The most common approach splits the market by the ratio of price-to-book values by thirds, into value (bottom third) and growth (top third), with the middle third being called “blend.” Here things start to get a little confusing. The Barra/Vanguard method splits value and growth into halves according to market cap—the most expensive half of the market cap is designated as “growth,” the other half as “value.”

Planet Ponzi by Mitch Feierstein

Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, Bernie Madoff, book value, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Future Shock, Glass-Steagall Act, government statistician, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, junk bonds, light touch regulation, Long Term Capital Management, low earth orbit, low interest rates, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Neil Armstrong, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, plutocrats, Ponzi scheme, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Ronald Reagan, tail risk, too big to fail, trickle-down economics, value at risk, yield curve

Oh yes, and a nuclear mess that isn’t cleared up and seems all set for a tragic replay. As for the purported health of the private sector: don’t be fooled. At the time of writing, Bank of America, which is the largest bank by assets in the United States, has a stock market capitalization equal to just 25% of its book value.7 A company’s book value is the total accounting value of its assets less the total accounting value of its liabilities. The value of its liabilities is relatively uncontroversial: a company owes what it owes. The value of its assets, however, is much more uncertain. A bank may claim that (let’s say) its mortgage book is worth $10 billion, but perhaps impending delinquencies and defaults mean that its true value is nearer $9 billion, or $8 billion.

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The fact that the stock market’s coldly calculating eye values Bank of America at just one-quarter of its supposed financial worth speaks volumes about how little faith the market truly has in the firm. And Bank of America is far from unique. Citigroup and JP Morgan Chase also trade at a substantial discount to book value. In Europe, RBS is valued at less than a fifth of book value, Deutsche Bank and Paribas at little more than half. It’s is being reported that RBS is in line for a fresh injection of government funds.8 In short, in the course of this very brief introductory review we’ve found that the US government has exponentially spiraling debts, that the monetary authorities appear to be slaves to the same Ponzi-ish gods, that the debt crisis in Europe is profound and growing, and that some of the major pillars of the global financial sector are worth a fraction of what their accounts would seem to imply.

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Madoff’ into their Inmate Locator. 4 ‘Bernie Madoff baffled by SEC blunders,’ New York Daily News, Oct. 31, 2009. 5 I haven’t sought to update The Economist’s data. The relatively low number for Manhattan real estate is eye-catching, but you can verify this from the NYC FY12 Tentative Assessment Roll, published Jan. 14, 2011. 6 Graph available direct from the Federal Reserve, www.federalreserve.gov. 7 Data from Reuters, extracted Aug. 19, 2011. 8 All book value ratios extracted from Reuters, Aug. 16–19, 2011. For more on the possible further injection of state funds into RBS, see Robert Peston, ‘If RBS needs capital, taxpayers will suffer,’ BBC Business News, Oct. 7, 2011. 9 Laurence Kotlikoff, ‘US is bankrupt and we don’t even know it,’ Bloomberg, Aug.11, 2010 (www.bloomberg.com).

Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David Aronson

Albert Einstein, Andrew Wiles, asset allocation, availability heuristic, backtesting, Black Swan, book value, butter production in bangladesh, buy and hold, capital asset pricing model, cognitive dissonance, compound rate of return, computerized trading, Daniel Kahneman / Amos Tversky, distributed generation, Elliott wave, en.wikipedia.org, equity risk premium, feminist movement, Great Leap Forward, hindsight bias, index fund, invention of the telescope, invisible hand, Long Term Capital Management, managed futures, mental accounting, meta-analysis, p-value, pattern recognition, Paul Samuelson, Ponzi scheme, price anchoring, price stability, quantitative trading / quantitative finance, Ralph Nelson Elliott, random walk, retrograde motion, revision control, risk free rate, risk tolerance, risk-adjusted returns, riskless arbitrage, Robert Shiller, Sharpe ratio, short selling, source of truth, statistical model, stocks for the long run, sugar pill, systematic trading, the scientific method, transfer pricing, unbiased observer, yield curve, Yogi Berra

Here, I summarize some of these key findings: • Small capitalization effect: A stock’s total market capitalization, defined as the number of shares outstanding multiplied by its price per share, is predictive of future returns.45 Stocks in a portfolio composed of the lowest decile portfolio of market capitalization earned about 9 percent per year more than stocks in the highest decile portfolio.46 This effect is most pronounced in the month of January. Recent studies show this indicator’s predictive power has disappeared since the mid to late 1980s. • Price-to-earnings ratio effect: Stocks with low P/E ratios outperform stocks with high P/E ratios.47 • Price-to-book-value effect: Stocks with low price to book value ratios outperform stocks with high price to book value ratios.48 The cheapest stocks, in terms of price to book, outperformed the most expensive stocks by almost 20 percent per year. • Earnings surprise with technical confirmation: Stocks reporting unexpected earnings or giving earnings guidance that is confirmed by strong price and volume action on the day after the news is announced earn an annualized return spread (longs – shorts) over the next month of over 30 percent.49 This strategy is a marriage of fundamental and technical information.

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However, because information that is known privately can never be confirmed, this version is not testable in a practical sense. 138 METHODOLOGICAL, PSYCHOLOGICAL, PHILOSOPHICAL, STATISTICAL FOUNDATIONS The semistrong version of EMH makes a less informative and narrower claim, saying that the market is only efficient with respect to public information. This version of EMH can be falsified with any evidence of market-beating returns produced by an investing strategy based on either public fundamental data (P/E ratios, book values, and so forth) or technical data (relative strength rank, volume turnover ratios, and so forth). In effect, EMH semistrong denies the utility of fundamental and technical analysis. Finally we have EMH weak, which makes the least bold and least informative claim. It asserts that the market is only efficient with respect to past price, volume, and other technical data.

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These earlier, and similarly misguided, efforts to save EMH were in response to studies that had shown that public fundamental information, such as the price-to-book ratio and PE ratio, could be used to generate excess returns.35 In response to this inconvenient evidence, EMH defenders claimed that low price-to-book ratios and low PE ratios were merely signals of stocks with abnormally high risk. In other words, the fact that a stock’s price is low relative to its book value is an indication that the company is facing difficulties. Of course, this reasoning is circular. What is key here is the fact that EMH advocates had not defined low price-to-book or low PE as risk factors in advance of the studies showing that stocks with these traits were able to earn excess returns.

Capitalism Without Capital: The Rise of the Intangible Economy by Jonathan Haskel, Stian Westlake

23andMe, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, Albert Einstein, Alvin Toffler, Andrei Shleifer, bank run, banking crisis, Bernie Sanders, Big Tech, book value, Brexit referendum, business climate, business process, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, cloud computing, cognitive bias, computer age, congestion pricing, corporate governance, corporate raider, correlation does not imply causation, creative destruction, dark matter, Diane Coyle, Donald Trump, Douglas Engelbart, Douglas Engelbart, driverless car, Edward Glaeser, Elon Musk, endogenous growth, Erik Brynjolfsson, everywhere but in the productivity statistics, Fellow of the Royal Society, financial engineering, financial innovation, full employment, fundamental attribution error, future of work, gentrification, gigafactory, Gini coefficient, Hernando de Soto, hiring and firing, income inequality, index card, indoor plumbing, intangible asset, Internet of things, Jane Jacobs, Jaron Lanier, Jeremy Corbyn, job automation, Kanban, Kenneth Arrow, Kickstarter, knowledge economy, knowledge worker, laissez-faire capitalism, liquidity trap, low interest rates, low skilled workers, Marc Andreessen, Mother of all demos, Network effects, new economy, Ocado, open economy, patent troll, paypal mafia, Peter Thiel, pets.com, place-making, post-industrial society, private spaceflight, Productivity paradox, quantitative hedge fund, rent-seeking, revision control, Richard Florida, ride hailing / ride sharing, Robert Gordon, Robert Solow, Ronald Coase, Sand Hill Road, Second Machine Age, secular stagnation, self-driving car, shareholder value, sharing economy, Silicon Valley, six sigma, Skype, software patent, sovereign wealth fund, spinning jenny, Steve Jobs, sunk-cost fallacy, survivorship bias, tacit knowledge, tech billionaire, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, total factor productivity, TSMC, Tyler Cowen, Tyler Cowen: Great Stagnation, urban planning, Vanguard fund, walkable city, X Prize, zero-sum game

This has occurred as R&D and SG&A (selling, general, and administrative expenses) as a percentage of sales has risen (see the solid line): the point being that many intangible investments, such as design, are allocated by accounting rules to SG&A. Figure 9.2. The declining informativeness of earnings and book value reporting. Bars show fraction of variance in market values accounted for by earnings and book values for companies entering stock market in successive decade. Line shows average R&D and selling, general, and administrative expenses as a share of scales for companies. Source: Lev and Gu 2016, figure 8.2. Second, Mary Barth, Ron Kasnik, and Maureen McNichols (2001) find that analysts are much more likely to cover firms with high intangible spending (measured by R&D and advertising).

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Rises in house prices for selected US cities Figure 6.5. Rises in real house prices for UK regions, 1973–2016 Figure 6.6. “Openness to Experience” and voting to leave the EU Figure 9.1. “Management” and “Leadership” mentions in the Harvard Business Review Figure 9.2. The declining informativeness of earnings and book value reporting Tables Table 2.1. Examples of Tangible and Intangible Business Investments Table 3.1. Categories of Intangible Investment Boxes Box 4.1. Knowledge, Data, Information, and Ideas: Some Definitions Box 5.1. Productivity and Profitability Explained Box 6.1. Measures of Inequality Box 6.2.

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But if they had invested in building trademarks in-house, the additions to intangible assets would have been zero.11 As a consequence, much (at least internal) investment in assets is hidden from view. Does that matter? Three tests suggest it is important. The first test is very broad brush, but revealing. Lev and Gu (2016) looked at companies that went public over each decade from the 1950s to the 2000s. For each of those decades/groups of companies, they asked: How correlated are book values and earnings to market values? Their results are very striking and set out in figure 9.2. The histogram bars show a very clear decline in the correlations over the decades, suggesting that financial accounts have indeed become much less informative of company earnings. This has occurred as R&D and SG&A (selling, general, and administrative expenses) as a percentage of sales has risen (see the solid line): the point being that many intangible investments, such as design, are allocated by accounting rules to SG&A.

Mastering Private Equity by Zeisberger, Claudia,Prahl, Michael,White, Bowen, Michael Prahl, Bowen White

Alan Greenspan, asset allocation, backtesting, barriers to entry, Basel III, Bear Stearns, book value, business process, buy low sell high, capital controls, carbon credits, carried interest, clean tech, commoditize, corporate governance, corporate raider, correlation coefficient, creative destruction, currency risk, deal flow, discounted cash flows, disintermediation, disruptive innovation, distributed generation, diversification, diversified portfolio, family office, fixed income, high net worth, impact investing, information asymmetry, intangible asset, junk bonds, Lean Startup, low interest rates, market clearing, Michael Milken, passive investing, pattern recognition, performance metric, price mechanism, profit maximization, proprietary trading, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, shareholder value, Sharpe ratio, Silicon Valley, sovereign wealth fund, statistical arbitrage, time value of money, transaction costs, two and twenty

OpFCF thus provides a business’s earnings after deducting the spending required to maintain the profitability and competitive position of the company. EV/Sales: Sales multiples are typically employed for companies with strong growth but high cyclicality and low or negative profitability. However, sales multiples are an incomplete comparison as they do not consider profitability or cash flow. EV/Book Value: EV to book value, or net asset value, is used for asset-heavy companies. Book value provides an intuitive, simple figure for comparison as it represents the residual value to the company’s owners after subtracting the value of liabilities from the value of assets. Exhibit 7.5 Historical Valuation Multiples of the Telecommunications Industry Multiples are typically considered on both a historical (last 12 months, or LTM) and forward-looking basis to reflect a company’s current and forecast performance.

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INDEX “2+20” fee structure “10+2” model 100-Day Plan see also First-100-Day-plan acquisitions active ownership boards of directors corporate governance family-owned SMEs minority settings specific settings advisors advisory committee, LP affiliated funds, LPAs all capital first model alpha alternative investment vehicles alternative strategies American-style waterfalls see deal-by-deal carry with loss carry-forward anchor investors articles of association (AOA) Asia asset classes assets under management (AUM) evolution of PE portfolio management private capital auctions AUM see assets under management ballooning portfolios benchmarks BidCo legal entity “bidding on the book” bidding for deal board deadlock boards of directors active ownership board members equity documentation P2P buyouts bonds book values bottom-up valuation boutiques breaches of contract break-up fees bridge loans broken deal fees business angels business risk buyers deal structuring direct secondaries exit processes LP secondaries “buying right and creating value early” approach buy-ins buyouts boards of directors characteristics corporate governance deal pricing debt documentation definition exit processes funding instruments historical aspects management buyouts management teams P2P transactions pricing adjustments target valuation transaction documentation types see also leveraged buyouts capital committed vs invested equity future aspects LPAs private capital calls capital efficiency carried interest carve-outs cash flow to debt service covenant cash flows EBITDA as proxy free cash flow effect management OpFCF risk management see also J-curves CDD see commercial due diligence change management chief executive officers (CEOs) China CIM see Confidential Information Memorandum clawbacks clean exits closed-end funds closing mechanisms club deals co-investments active/passive attractions of CPPIB investment approach direct investment funds portfolio management positioning risks of selection issues success rates commercial due diligence (CDD) commercialization committed capital common equity company valuation compensation plans Europe vs US European example completion accounts mechanism concentration risk conditions precedent (CPs) conditions subsequent Condor Travel Confidential Information Memorandum (CIM) conflicts listed PE firms listed PE funds management teams organizational culture consent clause, GPs consultants contingent payments contractual subordination control rights core-plus strategies corporate governance active ownership alignment of interest family-owned SMEs minority settings principles in a buyout sense of urgency SMEs in emerging markets specific settings triangle of governance corporate venture capital correlation costs of listing covenants CPPIB investment approach CPs see conditions precedent credit risk Crossland Logistics currency hedging data rooms DCF see discounted cash flow method DD see due diligence deal-by-deal carry with loss carry-forward deal documentation deal execution deal making deal pricing bidding for deal buyouts closing mechanisms outside the financial model P2P transactions post-closing adjustments deal selection deal sourcing annual deal funnel due diligence emerging markets exit preparation generating flow growth equity statistics venture capital deal structuring the art of buyers buyout funding instruments downside scenarios investment structures SPVs deal teams deals debt buyout documentation buyout funding instruments commitment letters deal pricing distressed investment structures see also junior debt; senior debt default events default risk denominator effect direct investment co-investment CPPIB investment approach implementation challenges institutional investors limited partners LP direct investment portfolio management risk ways to market direct lending direct secondaries directors see also boards of directors discounted cash flow (DCF) method discounts dissolution of fund distressed debt distressed end-of-fund life options distressed private equity distressed debt Europe vs US private debt turnaround investing “distribution-in-kind” distribution waterfalls diversification divestment period dividend preference provision dividend recapitalization documentation drag-along provisions dry powder due diligence (DD) areas of commercial considerations “conspiracy” exit preparation formal DD fund manager selection growth equity preliminary DD the process duration of fund early-stage companies see also start-up companies earnings before interest, tax, depreciation and amortization (EBITDA) buyouts deal pricing EMI music company financial due diligence financially driven CEOs growth equity target valuation valuation multiples economic alignment economic net income (ENI) economics of PE educating investors emerging markets deal sourcing ESG family-owned SMEs growth equity portfolio management EMI music company employee stock ownership plans (ESOPs) end-of-fund life options adjustment of fund terms distressed options extension of term steady-state options engagement, ongoing ENI see economic net income enterprise value (EV) buyouts definition target valuation valuation football field valuation multiples entrepreneurship entry multiples environmental factors environmental, social and governance (ESG) factors emerging frameworks emerging markets ESG today from risk to opportunity growth markets the individual factors measuring impact equity capital equity commitment letters equity control equity documentation control provisions economic provisions key provisions equity funding instruments equity story EquityCo entity ESG see environmental, social and governance factors ESOPs see employee stock ownership plans Europe compensation plans distressed private equity evolution of PE European-style waterfalls see all capital first model EV see enterprise value EV/Book Value valuation multiple EV/EBITDA valuation multiple events of default evolution of PE attractiveness of PE development of PE emerging segments future aspects impact of PE the next five years success and imitation three predictions EV/OpFCF valuation multiple EV/Sales valuation multiple executive mentors exit processes considerations dividend recapitalization early/late in fund life exit paths growth equity IPOs management optimizing exits preparing for sale secondary buyout concerns uniqueness of final asset “exit supercycle” experienced management fair value family businesses family-owned SMEs FDD see financial due diligence feeder funds fees break-up co-investment LPAs structures Final Investment Memorandum financial due diligence (FDD) financially driven CEOs firms see also listed PE firms First-100-Day plan first lien term loans first-time entrepreneurs first-time funds foreign exchange risk free cash flow effect full service value creation fund closings fund formation fund vehicles LPAs setting up funds fund-level fees fund management fund manager risk GP/LP relationship selection of manager fund restructuring fund structures, LPs fund terminology funding/funds alternatives to VC buyout instruments definition of PE funds funding risk funding in stages leveraged buyouts portfolio construction transfers winding down fundraising definition documentation first-time entrepreneurs last 45 years placement agents process roadmap timing/success chart GAAP see Generally Accepted Accounting Principles gas industry general limited partners (GLPs) general partners (GPs) adverse deal selections consent clause definition direct investment distributions post-exit ESG evolution of PE fund formation fundraising GP-led liquidity solutions in-house vs outsourced key relationships operational value creation optimizing exits performance reporting perspective of GP relationships with LPs removal of GP responsible investment rights/duties and LPAs risk management sale of the GP secondaries winding down funds zombie funds Generally Accepted Accounting Principles (GAAP) geographic location, VC global financial crisis (GFC) globalization GLPs see general limited partners good leaver/bad leaver provision governance see also corporate governance; environmental, social and governance factors GPs see general partners gross margin improvement growth equity characteristics corporate governance definition emerging markets exiting investments investment process minority shareholder rights partnerships targets target valuation unlocking growth value creation growth markets hands-on-support hedging risk high yield bonds holding period, definition human resources due diligence (HRDD) human resources risk IBOs see institutional buyouts illiquidity ILPA see Institutional Limited Partners Association imitation of success impact investing incentives indemnification independent directors industrialist endeavour, PE as an industry guidelines, ESG infrastructure funds in-house provisions initial public offerings (IPOs) in-kind distributions INSEAD Value Creation 2.0 (IVC 2.0) institutional buyouts (IBOs) institutional investors Institutional Limited Partners Association (ILPA) institutionalization of PE integrated ESG approach intercreditor agreements interest see carried interest interim liquidity interim performance reporting company valuation gross performance net performance unrealized value intermediated deal flow internal rate of return (IRR) bidding for deal corporate governance IRR conundrum modified IRR performance reporting invested capital investment growth equity process leveraged buyouts management manager, definition period, definition responsible restrictions VC process investment structures complex structure deal structures debt considerations equity considerations equity vehicles simple structure investors IPOs see initial public offerings IRR see internal rate of return IVC 2.0 see INSEAD Value Creation 2.0 J-curves junior debt debt instruments distressed private equity leveraged buyouts key performance indicators (KPIs) key person clause, LPAs key person risk KPIs see key performance indicators last 12 months (LTM) late-stage venture-backed companies LBOs see leveraged buyouts LDD see legal due diligence leadership legal due diligence (LDD) letters of intent (LOIs) leverage effect, IVC 2.0 leveraged buyouts (LBOs) bidding for deal “buying right and creating value early” approach capital efficiency compensation plans corporate governance deal structuring funding initial public offerings loan agreements management teams target valuation valuation value creation value drivers leveraged recapitalizations LFs see listed PE funds LGPs see listed PE firms lien subordination lifecycles of funds limited partners (LPs) advisory committee co-investments commitment strategies definition direct investment distributions post-exit dividend recapitalization ESG evolution of PE exit processes fund formation fundraising in-house vs outsourced limited liability optimizing exits outsourced vs in-house performance reporting perspective of LP portfolio management relationships with GPs responsible investment risk management secondaries secondary buyouts selecting investments winding down funds zombie funds limited partnership agreements (LPAs) capital and partners carried interest distributions post-exit organization partners and capital side letters zombie funds limited partnerships close-end direct investments PE fund structures portfolio management secondaries liquidation funds preference trusts liquidity GP-led solutions lack of interim minority shareholder rights portfolio management listed PE firms (LGPs) benefits of listing challenges from listing distraction from core business GAAP vs ENI listed PE funds (LFs) benefits challenges missing opportunities NAV comparison listed private equity (LPE) firms funds revenue generation loan agreements loans “loan-to-own” strategy locked-box closing mechanism LOIs see letters of intent LPAs see limited partnership agreements LPE see listed private equity LPs see limited partners LTM see last 12 months MAC see material adverse change macroeconomic risk majority deals management advisors capability change fees incentives portfolios presentation management buy-ins (MBIs) management buyouts (MBOs) management teams aligning VC funds assessment/appraisal board members buyouts changing chief executive officers compensation plans conflicts entrepreneurs management perspectives PE owner perspectives securing views of the PE owner role managers, fund managing investments market risk marketing material adverse change (MAC) mature companies MBIs see management buy-ins MBOs see management buyouts mentors, executive mezzanine loans MFN see most favored nations provisions minority equity stakes minority shareholders modified IRR (MIRR) MoM see multiple of money invested monitoring corporate governance fees management teams portfolio management zombie funds most favored nations (MFN) provisions multiple of money invested (MoM) multiples entry valuation natural resources investment NAV see net asset value NDAs see non-disclosure agreements negative screening net asset value (NAV) listed PE funds performance reporting portfolio management risk management secondaries net debt next 12 months (NTM) non-disclosure agreements (NDAs) non-performing loans (NPLs) North America see also United States (US) NPLs see non-performing loans NTM see next 12 months oil industry operating control operating free cash flow (OpFCF) operating partners operating teams operational change operational value creation full service industrialist endeavors in-house vs outsourcing levers for measurement outsourcing vs in-house resources roadmap OpFCF see operating free cash flow opportunistic strategies organizational challenges organizational culture outsourcing overhead reduction P2P see public-to-private transactions parallel funds partners see general partners; limited partners partnerships see also limited partnership...

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INDEX “2+20” fee structure “10+2” model 100-Day Plan see also First-100-Day-plan acquisitions active ownership boards of directors corporate governance family-owned SMEs minority settings specific settings advisors advisory committee, LP affiliated funds, LPAs all capital first model alpha alternative investment vehicles alternative strategies American-style waterfalls see deal-by-deal carry with loss carry-forward anchor investors articles of association (AOA) Asia asset classes assets under management (AUM) evolution of PE portfolio management private capital auctions AUM see assets under management ballooning portfolios benchmarks BidCo legal entity “bidding on the book” bidding for deal board deadlock boards of directors active ownership board members equity documentation P2P buyouts bonds book values bottom-up valuation boutiques breaches of contract break-up fees bridge loans broken deal fees business angels business risk buyers deal structuring direct secondaries exit processes LP secondaries “buying right and creating value early” approach buy-ins buyouts boards of directors characteristics corporate governance deal pricing debt documentation definition exit processes funding instruments historical aspects management buyouts management teams P2P transactions pricing adjustments target valuation transaction documentation types see also leveraged buyouts capital committed vs invested equity future aspects LPAs private capital calls capital efficiency carried interest carve-outs cash flow to debt service covenant cash flows EBITDA as proxy free cash flow effect management OpFCF risk management see also J-curves CDD see commercial due diligence change management chief executive officers (CEOs) China CIM see Confidential Information Memorandum clawbacks clean exits closed-end funds closing mechanisms club deals co-investments active/passive attractions of CPPIB investment approach direct investment funds portfolio management positioning risks of selection issues success rates commercial due diligence (CDD) commercialization committed capital common equity company valuation compensation plans Europe vs US European example completion accounts mechanism concentration risk conditions precedent (CPs) conditions subsequent Condor Travel Confidential Information Memorandum (CIM) conflicts listed PE firms listed PE funds management teams organizational culture consent clause, GPs consultants contingent payments contractual subordination control rights core-plus strategies corporate governance active ownership alignment of interest family-owned SMEs minority settings principles in a buyout sense of urgency SMEs in emerging markets specific settings triangle of governance corporate venture capital correlation costs of listing covenants CPPIB investment approach CPs see conditions precedent credit risk Crossland Logistics currency hedging data rooms DCF see discounted cash flow method DD see due diligence deal-by-deal carry with loss carry-forward deal documentation deal execution deal making deal pricing bidding for deal buyouts closing mechanisms outside the financial model P2P transactions post-closing adjustments deal selection deal sourcing annual deal funnel due diligence emerging markets exit preparation generating flow growth equity statistics venture capital deal structuring the art of buyers buyout funding instruments downside scenarios investment structures SPVs deal teams deals debt buyout documentation buyout funding instruments commitment letters deal pricing distressed investment structures see also junior debt; senior debt default events default risk denominator effect direct investment co-investment CPPIB investment approach implementation challenges institutional investors limited partners LP direct investment portfolio management risk ways to market direct lending direct secondaries directors see also boards of directors discounted cash flow (DCF) method discounts dissolution of fund distressed debt distressed end-of-fund life options distressed private equity distressed debt Europe vs US private debt turnaround investing “distribution-in-kind” distribution waterfalls diversification divestment period dividend preference provision dividend recapitalization documentation drag-along provisions dry powder due diligence (DD) areas of commercial considerations “conspiracy” exit preparation formal DD fund manager selection growth equity preliminary DD the process duration of fund early-stage companies see also start-up companies earnings before interest, tax, depreciation and amortization (EBITDA) buyouts deal pricing EMI music company financial due diligence financially driven CEOs growth equity target valuation valuation multiples economic alignment economic net income (ENI) economics of PE educating investors emerging markets deal sourcing ESG family-owned SMEs growth equity portfolio management EMI music company employee stock ownership plans (ESOPs) end-of-fund life options adjustment of fund terms distressed options extension of term steady-state options engagement, ongoing ENI see economic net income enterprise value (EV) buyouts definition target valuation valuation football field valuation multiples entrepreneurship entry multiples environmental factors environmental, social and governance (ESG) factors emerging frameworks emerging markets ESG today from risk to opportunity growth markets the individual factors measuring impact equity capital equity commitment letters equity control equity documentation control provisions economic provisions key provisions equity funding instruments equity story EquityCo entity ESG see environmental, social and governance factors ESOPs see employee stock ownership plans Europe compensation plans distressed private equity evolution of PE European-style waterfalls see all capital first model EV see enterprise value EV/Book Value valuation multiple EV/EBITDA valuation multiple events of default evolution of PE attractiveness of PE development of PE emerging segments future aspects impact of PE the next five years success and imitation three predictions EV/OpFCF valuation multiple EV/Sales valuation multiple executive mentors exit processes considerations dividend recapitalization early/late in fund life exit paths growth equity IPOs management optimizing exits preparing for sale secondary buyout concerns uniqueness of final asset “exit supercycle” experienced management fair value family businesses family-owned SMEs FDD see financial due diligence feeder funds fees break-up co-investment LPAs structures Final Investment Memorandum financial due diligence (FDD) financially driven CEOs firms see also listed PE firms First-100-Day plan first lien term loans first-time entrepreneurs first-time funds foreign exchange risk free cash flow effect full service value creation fund closings fund formation fund vehicles LPAs setting up funds fund-level fees fund management fund manager risk GP/LP relationship selection of manager fund restructuring fund structures, LPs fund terminology funding/funds alternatives to VC buyout instruments definition of PE funds funding risk funding in stages leveraged buyouts portfolio construction transfers winding down fundraising definition documentation first-time entrepreneurs last 45 years placement agents process roadmap timing/success chart GAAP see Generally Accepted Accounting Principles gas industry general limited partners (GLPs) general partners (GPs) adverse deal selections consent clause definition direct investment distributions post-exit ESG evolution of PE fund formation fundraising GP-led liquidity solutions in-house vs outsourced key relationships operational value creation optimizing exits performance reporting perspective of GP relationships with LPs removal of GP responsible investment rights/duties and LPAs risk management sale of the GP secondaries winding down funds zombie funds Generally Accepted Accounting Principles (GAAP) geographic location, VC global financial crisis (GFC) globalization GLPs see general limited partners good leaver/bad leaver provision governance see also corporate governance; environmental, social and governance factors GPs see general partners gross margin improvement growth equity characteristics corporate governance definition emerging markets exiting investments investment process minority shareholder rights partnerships targets target valuation unlocking growth value creation growth markets hands-on-support hedging risk high yield bonds holding period, definition human resources due diligence (HRDD) human resources risk IBOs see institutional buyouts illiquidity ILPA see Institutional Limited Partners Association imitation of success impact investing incentives indemnification independent directors industrialist endeavour, PE as an industry guidelines, ESG infrastructure funds in-house provisions initial public offerings (IPOs) in-kind distributions INSEAD Value Creation 2.0 (IVC 2.0) institutional buyouts (IBOs) institutional investors Institutional Limited Partners Association (ILPA) institutionalization of PE integrated ESG approach intercreditor agreements interest see carried interest interim liquidity interim performance reporting company valuation gross performance net performance unrealized value intermediated deal flow internal rate of return (IRR) bidding for deal corporate governance IRR conundrum modified IRR performance reporting invested capital investment growth equity process leveraged buyouts management manager, definition period, definition responsible restrictions VC process investment structures complex structure deal structures debt considerations equity considerations equity vehicles simple structure investors IPOs see initial public offerings IRR see internal rate of return IVC 2.0 see INSEAD Value Creation 2.0 J-curves junior debt debt instruments distressed private equity leveraged buyouts key performance indicators (KPIs) key person clause, LPAs key person risk KPIs see key performance indicators last 12 months (LTM) late-stage venture-backed companies LBOs see leveraged buyouts LDD see legal due diligence leadership legal due diligence (LDD) letters of intent (LOIs) leverage effect, IVC 2.0 leveraged buyouts (LBOs) bidding for deal “buying right and creating value early” approach capital efficiency compensation plans corporate governance deal structuring funding initial public offerings loan agreements management teams target valuation valuation value creation value drivers leveraged recapitalizations LFs see listed PE funds LGPs see listed PE firms lien subordination lifecycles of funds limited partners (LPs) advisory committee co-investments commitment strategies definition direct investment distributions post-exit dividend recapitalization ESG evolution of PE exit processes fund formation fundraising in-house vs outsourced limited liability optimizing exits outsourced vs in-house performance reporting perspective of LP portfolio management relationships with GPs responsible investment risk management secondaries secondary buyouts selecting investments winding down funds zombie funds limited partnership agreements (LPAs) capital and partners carried interest distributions post-exit organization partners and capital side letters zombie funds limited partnerships close-end direct investments PE fund structures portfolio management secondaries liquidation funds preference trusts liquidity GP-led solutions lack of interim minority shareholder rights portfolio management listed PE firms (LGPs) benefits of listing challenges from listing distraction from core business GAAP vs ENI listed PE funds (LFs) benefits challenges missing opportunities NAV comparison listed private equity (LPE) firms funds revenue generation loan agreements loans “loan-to-own” strategy locked-box closing mechanism LOIs see letters of intent LPAs see limited partnership agreements LPE see listed private equity LPs see limited partners LTM see last 12 months MAC see material adverse change macroeconomic risk majority deals management advisors capability change fees incentives portfolios presentation management buy-ins (MBIs) management buyouts (MBOs) management teams aligning VC funds assessment/appraisal board members buyouts changing chief executive officers compensation plans conflicts entrepreneurs management perspectives PE owner perspectives securing views of the PE owner role managers, fund managing investments market risk marketing material adverse change (MAC) mature companies MBIs see management buy-ins MBOs see management buyouts mentors, executive mezzanine loans MFN see most favored nations provisions minority equity stakes minority shareholders modified IRR (MIRR) MoM see multiple of money invested monitoring corporate governance fees management teams portfolio management zombie funds most favored nations (MFN) provisions multiple of money invested (MoM) multiples entry valuation natural resources investment NAV see net asset value NDAs see non-disclosure agreements negative screening net asset value (NAV) listed PE funds performance reporting portfolio management risk management secondaries net debt next 12 months (NTM) non-disclosure agreements (NDAs) non-performing loans (NPLs) North America see also United States (US) NPLs see non-performing loans NTM see next 12 months oil industry operating control operating free cash flow (OpFCF) operating partners operating teams operational change operational value creation full service industrialist endeavors in-house vs outsourcing levers for measurement outsourcing vs in-house resources roadmap OpFCF see operating free cash flow opportunistic strategies organizational challenges organizational culture outsourcing overhead reduction P2P see public-to-private transactions parallel funds partners see general partners; limited partners partnerships see also limited partnership...

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues by Alain Ruttiens

algorithmic trading, asset allocation, asset-backed security, backtesting, banking crisis, Black Swan, Black-Scholes formula, Bob Litterman, book value, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discounted cash flows, discrete time, diversification, financial engineering, fixed income, implied volatility, interest rate derivative, interest rate swap, low interest rates, managed futures, margin call, market microstructure, martingale, p-value, passive investing, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk/return, Satyajit Das, seminal paper, Sharpe ratio, short selling, statistical model, stochastic process, stochastic volatility, time value of money, transaction costs, value at risk, volatility smile, Wiener process, yield curve, zero-coupon bond

How can we justify the use of the traditional Gaussian distribution in such a case? The pillars of usual option pricing, namely risk neutrality and non-arbitrage condition, are not really valid in the present case. 4.1.5 The book value method Given the uncertainties of the previous method, this may be viewed as more exempt from any assumptions, since the book value of a company is the objectively measurable difference of its assets minus its liabilities, that is, its net value if all debts were repaid and all assets sold off. Unfortunately, this boils down to a price valuation based strictly on the current situation of the company, without taking account of its future. 4.2 STOCK INDEXES Stock indexes can be built in two ways.

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Index 4-moments CAPM actual (ACT) number of days AI see Alternative Investments “algorithmic” trading Alternative Investments (AI) American options bond options CRR pricing model option pricing rho amortizing swaps analytic method, VaR annual interest compounding annualized volatility autocorrelation corrective factor historical volatility risk measures APT see Arbitrage Pricing Theory AR see autoregressive process Arbitrage Pricing Theory (APT) ARCH see autoregressive conditional heteroskedastic process ARIMA see autoregressive integrated moving average process ARMA see autoregression moving average process ask price asset allocation attribution asset swaps ATM see at the money ATMF see at the money forward options at the money (ATM) convertible bonds options at the money forward (ATMF) options attribution asset allocation performance autoregression moving average (ARMA) process autoregressive (AR) process autoregressive conditional heteroskedastic (ARCH) process autoregressive integrated moving average (ARIMA) process backtesting backwardation basket CDSs basket credit derivatives basket options BDT see Black, Derman, Toy process benchmarks Bermudan options Bernardo Ledoit gain-loss ratio BGM model see LIBOR market model BHB model (Brinson’s) bid price binomial distribution binomial models binomial processes, credit derivatives binomial trees Black, Derman, Toy (BDT) process Black and Karasinski model Black–Scholes formula basket options beyond Black–Scholes call-put parity cap pricing currency options “exact” pricing exchange options exotic options floor pricing forward prices futures/forwards options gamma processes hypotheses underlying jump processes moneyness sensitivities example valuation troubles variations “The Black Swan” (Taleb) bond convexity bond duration between two coupon dates calculation assumptions calculation example callable bonds in continuous time duration D effective duration forwards FRNs futures mathematical approach modified duration options physical approach portfolio duration practical approach swaps uses of duration bond futures CFs CTD hedging theoretical price bond options callable bonds convertible bonds putable bonds bond pricing clean vs dirty price duration aspects floating rate bonds inflation-linked bonds risky bonds bonds binomial model CDSs convexity credit derivatives credit risk exotic options forwards futures government bonds options performance attribution portfolios pricing risky/risk-free spot instruments zero-coupon bonds see also bond duration book value method bootstrap method Brinson’s BHB model Brownian motion see also standard Wiener process bullet bonds Bund (German T-bond) 10-year benchmark futures callable bonds call options call-put parity jump processes see also options Calmar ratio Capital Asset Pricing Model (CAPM) 4-moments CAPM AI APT vs CAPM Sharpe capitalization-weighted indexes capital market line (CML) capital markets caplets CAPM see Capital Asset Pricing Model caps carry cash and carry operations cash flows cash settlement, CDSs CBs see convertible bonds CDOs see collateralized debt obligations CDSs see credit default swaps CFDs see contracts for difference CFs see conversion factors charm sensitivity cheapest to deliver (CTD) clean prices clearing houses “close” prices CML see capital market line CMSs see constant maturity swaps Coleman, T.

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short-term rates discount basis trading futures rate basis trading spot instruments skewness smiles, volatility smirks, volatility SML see security market line Sortino ratio sovereign bonds Spearman’s rank correlation coefficient special purpose vehicles (SPVs) specific risk speed sensitivity splines spot instruments bonds correlation modeling currencies forex swaps Gaussian hypothesis alternatives prices rates short-term rates volatility spreads SPVs see special purpose vehicles standardized futures contracts standard Wiener process see also dZ; general Wiener process stationarity stationary Markovian processes stochastic processes basis of Brownian motion definition of process diffusion processes discrete/continuous variables general Wiener process Markovian processes martingales probability reminders risk neutral probability standard Wiener process stationary/non-stationary processes terminology stock indexes basket options futures stock portfolios stock prices stock valuation book value method DCF method Gordon–Shapiro method real option method stocks without dividends stress tests Structural model Student distribution swaps bond duration conditional CRSs curves forwards ISDA second-generation swap points swap rate markets variance volatility see also forex swaps; interest rate swaps swaptions systematic factors Taiwan dollars (TWD) Taleb, Nassim Taylor series TE see Tracking Error term structure theoretical price forward foreign exchange futures theta time, continuous/discrete time horizon, VaR time value of option time-weighted rate of return (TWRR) Tiscali telecommunications Total total period, FRAs Toy see Black, Derman, Toy process Tracking Error (TE) tranches transfer functions Treasury bonds Treynor ratio trinomial trees TWD see Taiwan dollars TWRR see time-weighted rate of return Uhlenbeck see Ohrstein–Uhlenbeck unexpected credit loss United States dollars (USD) CRS swaps forward foreign exchange futures NDOs swap rates market volatility unwinding swaps USD see United States dollars valuation callable bonds credit derivatives IRSs stocks troubles value-at-risk (VaR) backtesting correlation troubles example important remarks methods parameters variants value-weighted indexes vanilla IRSs vanilla options vanilla swaps CRSs in-arrear swaps IRSs vanna VaR see value-at-risk variance-covariance method, VaR “variance gamma” process variance swaps Vasicek model VDAX index vega VIX index volatility annualized basket options correlation modeling curves delta-gamma neutral management derivatives dVega/dTime general Wiener process historical implied intraday volatility modeling option pricing practical issues realized models smiles smirks variance swaps vega volga vomma VXN index weather White see Hull and White model white noise AR process see also Brownian motion; standard Wiener process Wiener see general Wiener process; standard Wiener process WTI Crude Oil futures Yang–Zang volatility yield, convenience yield curves capital markets components CRS pricing cubic splines method definition EONIA/OIS swaps implied volatility interest rate options interpolations linear method methodology money markets points determination example polynomial curve methods swap curve swaps see also term structure yield to maturity (YTM) Z see dZ Zang see Yang–Zang volatility zero-coupon bonds zero-coupon rates see also spot instruments, rates zero-coupon swaps Z-score

Carjacked: The Culture of the Automobile and Its Effect on Our Lives by Catherine Lutz, Anne Lutz Fernandez

"Hurricane Katrina" Superdome, barriers to entry, Bear Stearns, book value, car-free, carbon footprint, collateralized debt obligation, congestion pricing, failed state, feminist movement, Ford Model T, fudge factor, Gordon Gekko, housing crisis, illegal immigration, income inequality, inventory management, Lewis Mumford, market design, market fundamentalism, mortgage tax deduction, Naomi Klein, Nate Silver, New Urbanism, oil shock, peak oil, Ralph Nader, Ralph Waldo Emerson, ride hailing / ride sharing, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, traffic fines, traumatic brain injury, Unsafe at Any Speed, urban planning, white flight, women in the workforce, working poor, Zipcar

Their outlets mainly sell to people who have poor credit ratings or those who cannot get car loans because they haven’t yet held a credit card or borrowed any money—people like Inna, an Israeli immigrant to the United States who was told at a variety of used car lots that they couldn’t give a car loan to someone who was a “ghost,” that is, someone with no credit history. J. D. Byrider’s customers get the dubious opportunity to buy American cars of five or so years’ vintage at prices far surpassing the Blue Book value, and with loan rates far above even the worst of the used car lots that use bank financing. For instance, the day we visited, J. D. Byrider was selling a 2004 Hyundai Accent with 96,000 miles for $9,000. As with other cars on the lot, the true Blue Book value of the car, even in excellent condition, is much less, at $2,880. The cheerful salesman boasted that he helped people not just into a car, but into the American Dream of home ownership: “We help you establish a good credit history,” he said.

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Buyers without a credit history, such as many immigrants and young 108 Carjacked people, or those with bad credit ratings must shop at “buy here, pay here” lots, where the lot owners themselves make the car loans. In addition, the independent lots where the cheapest cars are found are often fly-by-night, sly-by-day operations, trading in cars with salvage or junk titles. Down payments are high, interest rates deserve to be called extortionate, and prices often far exceed the Blue Book value, factors that account for the much higher profitability of high-mileage car sales—on average, they extract a gross profit of $3,800 per car (and this on simple lots out on the edge of town with very low overhead).10 Loan rates for these used cars can soar as high as 35 percent, costing buyers a full $4,044 in interest for a two-year loan on a $10,000 vehicle.

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A moderately priced sedan like a Nissan Altima could cost $7,500 a year, a similarly sized Cadillac $12,300. These are the annual average costs figured over five years of ownership and 15,000 miles per year of driving for 2008 models at www.edmunds.com. See also Oasis Design, “Factsheet: What does driving really cost?” www.oasisdesign.net/transport/cars/ cost.htm. Kelly Blue Book values show an average American car selling for $1,750 less when driven 15,000 versus 5,000 miles over the course of five years. Jason E. Bordoff and Pascal J. Noel, Pay-as-You-Drive Auto Insurance: A Simple Way to Reduce Driving-Related Harms and Increase Equity (Washington, DC: Brookings Institution, July 2008).

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, book value, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, financial engineering, fixed income, global macro, high net worth, implied volatility, index fund, interest rate swap, invisible hand, managed futures, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk free rate, risk tolerance, risk-adjusted returns, risk/return, search costs, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

If the average return on this portfolio is positive, then we may conclude that expected return to inflation exposure is positive. In the same manner one can create factor portfolios representing size, value/growth, P/E, momentum, industry, and others. One of the most commonly used factor models is the Fama-French 4-factor model. The four factors are: 1. 2. 3. 4. Excess return to the market High book value minus low book value (HML) Small minus big (SMB) Up minus down (UMD) That is, HML represents returns to a long/short portfolio sorted on book-to-market, with high book-to-market stocks long and low bookto-market stocks short. SMB represents returns to a long/short portfolio, with small cap stocks long and large cap stocks short.

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See S&P Goldman Sachs Commodity Index (S&P GSCI index) Groupings, 111–117, 126–132 Growth in Corporate Earnings, 52 Hedge funds, 13, 43, 54, 59, 61, 65, 68, 89, 129, 131–132 benchmarks, 270–272 index vs fund investment example, 189–194 indices, 185–189 myths about, 219–223 return and risk performance, 140–143, 220 and risk, 118 sources of return, 139–140 Hedge ratio, 204, 205 Heuristic models, 120–122 HFRX indices, 189 High book value minus low book value (HML) factor, 45 Historical data, 94, 215 Hybrid REITs, 158 Illiquid assets, 63, 98, 217 Indices. See also Benchmarks INDEX alternative hedge funds, 186–188 biases, 192 buy-write, 206 commodity, 182–185 hedge funds, 185–189 passive security-based, 140 private equity, 171, 174 problems in creation of, 168–169 replication-based, 122–126 S&P/Case Shiller Home Price, 175 stocks and bonds, 168–170 Inefficiency, 101 Inflation risk, 96–97, 163, 196 Informational uncertainty, 214 Initial Portfolio Theory (IPT), 3 Inputs, estimating, 94–95 Insurance, 12, 98 Interest risk, 196, 198–199 Investable manager based hedge fund indices, 185 Investable securities, 123 Investment banks, 227–228 Investment horizon risk, 19 Investment managers, 25, 216–217, 218 active versus passive, 46 evaluation and review, 232–233 and fund returns, 215 hedge funds, 185 skill of, 139, 146 value of discretion, 230–232 Investments: alternative (See Alternative investments) correlations strategy, 68–69 descriptive statistics, 67 passive alternatives, 54 Investors, 218–219 attitudes and asset value, 213–214 and hedge funds, 139 objectives, 59–60, 99 protecting, 243–245 risk tolerance, 89, 117–119 J-curve effect, 151 Kurtosis, 29, 223 Lagging, 175 Lead-lag relationship, 103 Leverage, 218 Leveraged buyouts, 151 291 Index Liabilities, 96, 99 Linear factor models, 124 Linear regression, 7, 40, 198 Liquidity, 62, 64, 98, 122, 127 Liquidity risk, 197 Long collar, 208–210 Madoff, Bernard, 233–235 Managed futures, 65, 68, 143–148 Managers.

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Black Swan, Black-Scholes formula, bonus culture, book value, break the buck, buy and hold, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delayed gratification, diversification, Edmond Halley, facts on the ground, fear index, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, Greenspan put, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, proprietary trading, regulatory arbitrage, rent-seeking, Richard Thaler, risk free rate, risk tolerance, risk/return, Ronald Reagan, Salesforce, Savings and loan crisis, seminal paper, shareholder value, short selling, statistical model, subprime mortgage crisis, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

The Billion-Dollar Swap Meet These two approaches to taking credit risk—the actuarial and the market approach—have created two distinct cultures in finance: the long-term world of lending banks, insurance companies, and pension funds, and the short-term world of trading firms and hedge funds. This cultural divide was hardwired into the system via accounting rules and regulations. Lending banks and insurers have typically recorded their holdings of loans and bonds at book value, which is the amount originally lent out, with some allowance for interest accruals. Book value could only be written down when a borrower had defaulted or was clearly in difficulty. Investment banks (including the parts of lending banks that trade), mutual funds, and hedge funds use fair value accounting. This is typically the market price, and if the market doesn’t like a particular borrower or its loans, this immediately lands on the balance sheets of its creditors.

…

What most enraged Goldman was how banks such as the newly merged JPMC, Citigroup, and Bank of America were poaching blue-chip clients by dangling the prospect of actuarially driven cheap loans as a sweetener. For those that depended on traditional credit investors to lend them money, the historical pricing of default risk kept their loans cheap because they were still using accounting rules that kept the value of loans frozen at book value. This made their loans “cheaper” than those based on the CDS market—if JPMC lent $1 billion to a big customer, and the credit derivative market implied that the loan was now worth only $800 million, then so much the worse for credit derivatives. Without the ability to freeze the value of loans on its balance sheet, Goldman had to either sell loans at the secondary market price or buy credit derivative protection.

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Although Deutsche denies Linares’s involvement, the lure of the financial iPhone caught the attention of Justo Palma, a fund manager for a mutual fund company called BZ Gestion in the city of Saragossa, northeast of Madrid, in 2001.9 Palma invited several banks to propose a structured product for one of BZ Gestion’s money market funds, and Deutsche Bank won the tender, selling a REPON-style product containing a single slice of a synthetic CDO. Unfortunately, a money market fund is not the same as an insurance company, which holds its assets at book value. Palma’s purchase was marked to market once a month, and as the provider of the product, Deutsche was obliged to provide its valuation. This quickly exposed a significant difference between the price Palma had paid and what the CDO was worth, even without any defaults in the portfolio. By 2002, BZ Gestion noticed that its low-risk fund was heavily underwater, and worse still, it was a kind of fund that Spanish regulators had banned from investing in credit derivatives.

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Bernie Madoff, Black-Scholes formula, book value, British Empire, business cycle, buy and hold, buy the rumour, sell the news, Claude Shannon: information theory, clean tech, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, do what you love, Edward Thorp, family office, financial independence, fixed income, Flash crash, global macro, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, legacy carrier, Long Term Capital Management, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, Michael Milken, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Reminiscences of a Stock Operator, Right to Buy, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Savings and loan crisis, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

We used to argue, why buy a piece of commercial real estate with a 6 percent cap rate or a bond with a 7 percent yield if you could buy a business like Macy’s with a 20 percent cap rate? For financial companies and banks, I use some of the following: Price/tangible book value—The tangible book value (TBV) is equal to the book value minus intangible assets, such as patents and goodwill. Assuming the loans on a bank’s balance sheet have been appropriately accounted for—a big assumption considering the events in the financial industry over the past several years—a bank trading around its TBV would represent the value at which one could theoretically liquidate the bank.

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At the start of 2000, I was trying to figure out what went wrong in 1999. I have what I call my Evel Knievel screen. These are companies that are trying to jump the Grand Canyon and probably won’t make it. There are only two conditions for the screen. First, the company is trading at more than five times book value. Second, the company is losing money. My job is to figure out which stocks won’t make it across the Grand Canyon and then go short those stocks. At the time, the Internet business model was to get share on the net. It didn’t make a difference how much money you lost doing it, as long as you increased your share.

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One problem with equal weighting is that stock number 500 is much smaller than stock number 1, and if too many people try to do equal weighting, the amount of buying in the smaller stocks would distort their prices. Additionally, because prices are always changing, there are more transaction costs in maintaining an equal weighted index. Because of these problems, Rob Arnott came up with a fundamentally based index (the RAFI FTSE index), which weights companies based on the size of their sales, book value, cash flow, and dividends rather than their market capitalization. Because the weighting factors used in the index are correlated to company market capitalization, larger market capitalization companies will account for a larger percentage of the total index. And since price is not involved, errors are also random, similar to an equal weighted index, and the index performs about 2 percent better than capitalization weighted indexes.

The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the JunkBond Raiders by Connie Bruck

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Alvin Toffler, Bear Stearns, book value, Carl Icahn, corporate raider, diversified portfolio, Edward Thorp, financial independence, fixed income, Future Shock, Glass-Steagall Act, Irwin Jacobs, junk bonds, Michael Milken, mortgage debt, offshore financial centre, Oscar Wyatt, paper trading, profit maximization, Tax Reform Act of 1986, The Predators' Ball, yield management, Yogi Berra, zero-coupon bond

Icahn and others had started a new-wave proxy fight, in which the aim was not so much to replace management (although Icahn had done this at Baird and Warner) as to attract the attention of third parties to an undervalued company. And the issues in the proxy fight were framed in terms of shareholder profits. Icahn would point out that the stock was trading at some paltry fraction of book value, and that there was real potential for better earnings. In 1979 Icahn won a proxy fight to gain board seats and then forced the sale of Tappan, the stove-maker—whose stock was trading at around 8 and had a book value of over $20 a share—to AB Electrolux, a Swedish-owned home-appliance manufacturer, at a price that gave Icahn a profit of close to $3 million. “Tappan worked like a charm for Carl,” said his lawyer for that deal, Morris Orens of Olshan Grundman and Frome.

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Drexel’s monopoly of this market, following the earlier years of monopoly of the nontakeover junk market, had resulted in a trajectory of growth that was unprecedented on Wall Street. At the end of 1977, Drexel’s revenues were about $150 million; the firm had about $75 million in capital, of which less than $40 million was equity. The book value of its stock (as of August 1977) was $4.47 per share. By the end of 1985, the firm’s revenues were $2.5 billion; it had about $1 billion of capital, of which over 75 percent was equity. The book value of its stock was $58.66 per share. Its profits were thought to be about $600 million pretax and $304.2 million after taxes—which would place it not far behind the mammoth Salomon Brothers, which had nearly double Drexel’s capital.

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But in 1973 Burnham had no idea that the value of Drexel Firestone resided not in its major-bracket franchise but in one rather odd, intense figure segregated off in a corner of the trading floor. The juxtaposition of the names was the most costly part of the transaction for Burnham. Beyond that, he paid book value (the capital its partners had invested in it), mainly with subordinated debentures. Now Drexel, home to the kind of white Anglo-Saxon Protestants who took their genealogy seriously, not only had a Jewish trader peddling schlock bonds but had been taken over by a Jewish firm. Although Burnham and most of the top executives of the firm were Jews, Robert Linton, who became the firm’s chairman in the early eighties and who changed his name from Lichtenstein, demurred slightly at this characterization of Burnham and Company.

Reinventing Capitalism in the Age of Big Data by Viktor Mayer-Schönberger, Thomas Ramge

accounting loophole / creative accounting, Air France Flight 447, Airbnb, Alvin Roth, Apollo 11, Atul Gawande, augmented reality, banking crisis, basic income, Bayesian statistics, Bear Stearns, behavioural economics, bitcoin, blockchain, book value, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, Cass Sunstein, centralized clearinghouse, Checklist Manifesto, cloud computing, cognitive bias, cognitive load, conceptual framework, creative destruction, Daniel Kahneman / Amos Tversky, data science, Didi Chuxing, disruptive innovation, Donald Trump, double entry bookkeeping, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Evgeny Morozov, flying shuttle, Ford Model T, Ford paid five dollars a day, Frederick Winslow Taylor, fundamental attribution error, George Akerlof, gig economy, Google Glasses, Higgs boson, information asymmetry, interchangeable parts, invention of the telegraph, inventory management, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, job satisfaction, joint-stock company, Joseph Schumpeter, Kickstarter, knowledge worker, labor-force participation, land reform, Large Hadron Collider, lone genius, low cost airline, low interest rates, Marc Andreessen, market bubble, market design, market fundamentalism, means of production, meta-analysis, Moneyball by Michael Lewis explains big data, multi-sided market, natural language processing, Neil Armstrong, Network effects, Nick Bostrom, Norbert Wiener, offshore financial centre, Parag Khanna, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price mechanism, purchasing power parity, radical decentralization, random walk, recommendation engine, Richard Thaler, ride hailing / ride sharing, Robinhood: mobile stock trading app, Sam Altman, scientific management, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, Snapchat, statistical model, Steve Jobs, subprime mortgage crisis, Suez canal 1869, tacit knowledge, technoutopianism, The Future of Employment, The Market for Lemons, The Nature of the Firm, transaction costs, universal basic income, vertical integration, William Langewiesche, Y Combinator

Accounting standards, for example, have long mandated that the value of certain assets on a company’s balance sheet should equal their historical cost. That was easy and straightforward: if land was bought for $1 million, its book value would also be $1 million. But that value did not necessarily reflect reality: the land might have gotten much more or less valuable in the meantime. The book value as a single figure provided information about the historical transaction but did not convey much about its current value. Figures in balance sheets could therefore not be trusted—not because they were wrong but because they might be outdated.

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See Daimler; Ford Motor Company; General Motors; Tesla Autopilot, 78 Autor, David, 195 Avant, 151 Bacon, Francis, 223 Baidu, 30, 151 Bank La Roche, 136 banks, 11, 12, 137, 138–140, 146–156 capital share of, 185, 186 central, 134–135, 149 choice expansion in, 215–216 cost cutting in, 146–148 crisis facing, 134–136 government loans to, 134 investment planning by, 150, 154–155 Italian merchant families in, 91 lending by, 150–151 payment businesses competing with, 146–147 poor insight of, 154 regulations affecting, 139–140 reinvention of from within, 146, 149–156 traditional role of, 138–139 Barclays, 215 Bardi family, 91 Barkai, Simcha, 194, 195 barter economy, 45 Bastani, Aaron, 221 Bauer, Florian, 55 Bear Stearns, 155 Beer, Staffors, 175–176 Bethlehem Steel, 95 Betterment, 151, 153 Bezos, Jeff, 68, 88, 89, 96, 106, 107, 130 Big Data, 77, 213, 219, 222 See also data-rich markets Bitcoin, 48, 147 BlaBlaCar, 3, 9, 65 blockchain, 147, 148 BMW, 120 book value, 172 bookkeeping, 92–93 bounded rationality, 104 Brezhnev, Leonid, 221 Bridgewater Associates, 114–115 Brookings Institution, 186 Brown, John Seely, 31 Brynjolfsson, Erik, 184, 220 Buick Motor Company, 98 cacao beans (as currency), 48 Canada, 191–192 capital, 15, 133–156 abundance of, 142–143, 194 banks’ shift from, 134–136, 138–140, 146–156 future role of, 11–12, 141 problems caused by decline of, 141–144 signaling with, 141–143 steady value of predicted, 144 See also money; price capital gains tax, 187 Capital in the Twenty-First Century (Piketty), 186 capital share, 185–186, 193–195, 197, 198 Carnegie Mellon University (CMU), 60 Case, Bob, 133–134 castells, 17–20 cell phones.

Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street by Kate Kelly

Alan Greenspan, bank run, Bear Stearns, book value, buy and hold, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, eat what you kill, fixed income, housing crisis, index arbitrage, Long Term Capital Management, margin call, moral hazard, proprietary trading, quantitative hedge fund, Renaissance Technologies, risk-adjusted returns, shareholder value, technology bubble, too big to fail, traveling salesman

During a question-and-answer session with Cayne on another Bear investment day when the firm’s stock was flying high, one of the brokerage-firm analysts asked innocently if Cayne planned to have the company buy back any stock—a common tactic for returning capital to shareholders, reducing the number of shares outstanding, and boosting the earnings per share. “Why would I buy the stock when it trades at well over book value?” Cayne replied, indicating that the stock was far above the price he’d want to pay for it. Some of the analysts looked stunned. Watching from the sidelines, Molinaro was mortified. You want these people to recommend the stock to their clients, he thought, and yet you think it’s too expensive.

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BONY seemed uninterested, but Deutsche Bank appeared to be a possibility. He knew it would depend on what the big bosses in Germany thought. Schwartz opened the call to questions. Guy Moszkowski, a Merrill Lynch analyst, was one of the first to speak up. He had a “buy” rating on the company and a price target of close to $100 and wanted to know if Bear’s “book value,” the self-determined value of its assets—then estimated at a little more than $80 per share—still held. Molinaro said it did. There was a question about the pace at which prime-brokerage clients were withdrawing money from the firm: Had the pace accelerated that day? Molinaro stumbled. “It has been, I think, more or less—I don’t want to say at a higher level or a lower level—not materially different from what we’ve been dealing with during the week on that side.”

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Morgan that their lowball bid—literally a third of where the stock had traded on Friday!—was unacceptable. He and Schwartz talked it over. Could they rebuff J.P. Morgan? Molinaro asked. No matter how he looked at it, Bear was worth more than $8 to $12 per share. Just yesterday, Schwartz and Molinaro had told analysts on the investor call that Bear’s book value—the value the company assigned itself per share—was still intact, at more than $80 per share. Even with a substantial discount, Bear was worth at least $50 to $60 per share—wasn’t it? Away from the raw numbers, there was also the consideration of how J.P. Morgan could run a company if most of its employees simply fled.

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

Alan Greenspan, asset allocation, banking crisis, banks create money, barriers to entry, behavioural economics, benefit corporation, Berlin Wall, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, book value, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, data science, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, equity risk premium, Fall of the Berlin Wall, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, forward guidance, Francis Fukuyama: the end of history, general purpose technology, gentrification, geopolitical risk, George Akerlof, Glass-Steagall Act, household responsibility system, housing crisis, index fund, invention of the printing press, inverted yield curve, Isaac Newton, James Watt: steam engine, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, Kickstarter, Kondratiev cycle, liberal capitalism, light touch regulation, liquidity trap, Live Aid, low interest rates, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, oil shock, open economy, Phillips curve, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Shenzhen special economic zone , Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, tail risk, Tax Reform Act of 1986, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

The MSCI indices based on growth and value, for example, include the following definitions:1 MSCI growth segmentation is based on five variables: Long-term forward EPS growth rate. Short-term forward EPS growth rate. Current internal growth rate. Long-term historical EPS growth trend. Long-term historical sales per share growth trend. MSCI value segmentation is based on three variables: Book value to price. 12-month forward earnings to price. Dividend yield. There tends to be some crossover between these factors and the cyclical versus defensive axis. Typically, value companies are more cyclical and defensive ones can overlap with growth to some degree. A simple correlation between value relative to growth and industrial production (a measure of growth in the real economy) shows a positive, albeit not very strong, relationship.

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According to the so-called value premium, first identified by Graham and Dodd (1934),2 shares with a high book-to-market ratio of equity value or low P/E ratio (generally referred to as value stocks) provide, on average, higher returns than shares with a low book-to-market ratio (growth stocks). This has been widely corroborated in the academic literature, perhaps most famously by Eugene F. Fama and Kenneth R. French,3 who showed that in the period from 1975 to 1995 the difference between average returns on global portfolios of high and low valuation stocks (using price-to-book value) was 7.68% per year and that value had outperformed growth in 12 of the 13 markets they examined. A more important driver of the relative performance between value and growth is their respective relationship with interest rates and bond yields, typically described as their ‘duration’. The definition of equity duration closely follows the definition of bond duration (identified by Macaulay [1938]).4 Similar to bond duration, equity duration relates to the length of time until investors expect to receive future cash flows from their investment in a company's shares; hence, in this sense, duration is a measure of the company's cash-flow maturity and, therefore, interest rate sensitivity.

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From that point, inflation started to fall around the world and, coupled with a vigorous recovery in economic activity from a deep recession, confidence – and asset valuations – started to rise. From August 1982 to December 1999, the compound real return on the Dow Jones Industrial Average was 15% per year, well in excess of long-run average returns or indeed the increase in earnings or book value over the period.5 Much of this secular bull market therefore reflected valuation expansion – a phenomenon that pushed up both equity and fixed income (bond) returns at the same time. The 1980s also experienced a wide range of deregulation, reform and privatisation under the Reagan and Thatcher administrations in the US and the UK, respectively.

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, behavioural economics, Black Swan, Black-Scholes formula, Bonfire of the Vanities, book value, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial engineering, financial innovation, fixed income, frictionless, frictionless market, Future Shock, George Akerlof, global macro, implied volatility, index arbitrage, intangible asset, Jeff Bezos, Jim Simons, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, loose coupling, managed futures, margin call, market bubble, market design, Mary Meeker, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Solow, rolodex, Saturday Night Live, selection bias, shareholder value, short selling, Silicon Valley, statistical arbitrage, tail risk, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, UUNET, William Langewiesche, yield curve, zero-coupon bond, zero-sum game

And in many cases, once they have been created and the intellectual property has been claimed, they cannot be reproduced at any price. One simple indication that the current accounting conventions do not reflect the actual value of the enterprise is the disconnect that has appeared between market and book value. In the industrial era of the railroads, market value was all but defined by book value. If market value moved above book value, you would simply create the same enterprise for less money by replacing it brick by brick. The market-to-book ratio stayed near one-to-one through the 1970s, but since the 1980s has slowly moved up. The ratio in the mid-1990s was on average about three-to-one, and shot up to six-to-one by the end of the decade.

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And the merger made sense for Salomon’s largest shareholder, Warren Buffett, who had been spending years trying to figure out a profitable exit strategy for his Salomon investment. Salomon was being purchased 75 ccc_demon_051-076_ch04.qxd 7/13/07 2:43 PM Page 76 A DEMON OF OUR OWN DESIGN for more than $8 billion, nearly two times book value; in reaction, its stock had climbed 80 percent from its recent trading level. Buffett would be able to exchange his control of almost 20 percent of Salomon for a stake in Travelers Group, and with the Weill-led team he would have a firm that was run by the high-quality management he valued. But the impetus for the merger, what led to discussions in the late summer between Weill and Maughan, was the weakening of Salomon’s trading position from the MCI/BT trade.

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

"World Economic Forum" Davos, AI winter, Alan Greenspan, algorithmic trading, AOL-Time Warner, Apollo 11, asset allocation, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, Bob Litterman, book value, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Charles Babbage, citizen journalism, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, electricity market, Emanuel Derman, en.wikipedia.org, experimental economics, fake news, financial engineering, financial innovation, fixed income, Ford Model T, Gordon Gekko, Hans Moravec, Herman Kahn, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, Ivan Sutherland, Jim Simons, John Bogle, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, machine readable, machine translation, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, military-industrial complex, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, semantic web, Sharpe ratio, short selling, short squeeze, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, stock buybacks, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, tontine, too big to fail, transaction costs, Turing machine, two and twenty, Upton Sinclair, value at risk, value engineering, Vernor Vinge, Wayback Machine, yield curve, Yogi Berra, your tax dollars at work

Carol Loomis, “Robert Rubin on the Job He Never Wanted,” Fortune, November 28, 2007, http://money.cnn.com/2007/11/09/news/newsmakers/merrill_rubin.fortune/ index.htm. 6. Marking to market is the process of evaluating a security to reflect its current market value instead of its purchase price or book value. Marking to market is generally a good idea, but there are circumstances when it can serve to amplify the effect of what might otherwise be a short-lived mini-panic. A discussion is beyond the scope of this chapter. 302 Nerds on Wall Str eet 7. Ben Bernanke, “Reducing Systemic Risk,” Jackson Hole, Wyoming, August 22, 2008, http://federalreserve.gov/newsevents/speech/bernanke20080822a.htm. 8.

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Most likely, they will throw good money after bad investments (in order to avoid further write-downs), causing these banks to become an even bigger black hole of taxpayer money than in the TARP variations. Most damningly, it exacerbates the too-big-to-fail problem and will crowd out new, healthy private banks that may have otherwise emerged in the next few years. A Simple Structural Solution The $700 billion is a huge amount of money—more than the equity book values of Goldman Sachs, Morgan Stanley, JPMorgan, Citigroup, Washington Mutual, Bank of America, and Wachovia combined. This money should be used to capitalize new banks throughout the country. To be operational as quickly as possible and to preserve valuable human and operational capital, these banks will buy good operational assets from insolvent banks in FDIC receivership.

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The shares of the new banks will be distributed to the American Assets Deposits Cash $35B of New Equity Financial Assets Operational Assets Loan A Loan B Deposits Insolvent Bank Financial Assets Cash from Bank A Loan A Loan B FDIC Claims Liabilities FDIC Cash Liabilities New Bank A Operational Assets Assets $35B of New Equity Assets Cash Insolvent Bank Liabilities Assets New Bank A Figure 13.4 Once an insolvent bank enters FDIC receivership, the deposits, operational assets, and employees will be taken over by newly capitalized Bank A. It will pay book value for the assets. The rest of the assets will stay in receivership and be divided between the creditors and the FDIC. Bank A is able to become quickly operational with its share of the NABI $300B+ of lending capacity. Even more, the operational and human assets of the insolvent bank are preserved rather than liquidated.

Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher

book value, business climate, business cycle, buy and hold, data science, El Camino Real, estate planning, fixed income, index fund, low interest rates, market bubble, market fundamentalism, profit motive, RAND corporation, Salesforce, the market place, transaction costs, vertical integration

As I write these words in the closing weeks before the decade of the 80's is about to start, it amazes me that more attention has not been paid to restudying the few years of stock market history that started in the second half of 1946 to see whether true parallels may actually exist between that period and the present. Now, for the third time in my life-time, many stocks are again at prices which, by historic standards, are spectacularly low. In relation to reported book value, they may not be quite as cheap as they were in the post-World War II period. However, if that reported book value is adjusted for replacement value in real dollars, they may perhaps be cheaper than in either of the two prior, bargain value periods. The question arises: are the worries that are holding back stock values in the present period, such matters as the high cost of energy or the dangers from the political left or of overextended credit, with the inevitable resulting drain on the level of business activity as liquidity is restored, more serious and more apt to stop the future growth in this country than the fears that held back stock prices in these two prior periods?

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Instead it was in the “service business,” receiving fees for supplying market-research information to its customers. It was true that in 1958 banks and insurance companies had long been well regarded in the marketplace as industries worthy of conservative investment. However, such industries were hardly comparable. Since the book value of a bank or insurance company is in cash, liquid investments or accounts receivable, the investor buying a bank or insurance stock seemed to have a hard core of value to fall back on that did not exist for this new kind of service company being introduced to the financial public. However, investigation of the A.

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On March 13 the clos-ing quotation was 60, a gain of almost 25 percent! What had happened was that after the close of the exchange on the 12th, an announcement was made that Motorola was getting out of the television business and was selling its U.S. television plants and inventory to Matsushita, a large Japanese manufacturer, for approximate book value. Now it had been known generally that Motorola's television busi-ness was operating at a small loss and to that extent was draining the profits of the rest of the company's business. This of itself would warrant the news to cause some increase in the price of the shares, although hardly the degree of rise that actually occurred.

Toyota Production System: Beyond Large-Scale Production by Taiichi Ohno, Norman Bodek

book value, business cycle, Ford Model T, inventory management, Kanban, Toyota Production System

I want to advocate that, like workers, machines that give long service should be used with great, great care. The language of business economics talks of "depreciation," "residual value," or "book value" - artificial terms used for accounting, tax purposes, and convenience. Unfortu nately, people seem to have forgotten that such terms have no relevance to the actual value of a machine. For example, we often hear: "This machine has been depreciated and paid off, and, therefore, we can discard it any time without loss," or "The book value of this machine is zero. Why spend money on an overhaul when we can replace it with a new, advanced model?" This kind of thinking is a big mistake.

The Green New Deal: Why the Fossil Fuel Civilization Will Collapse by 2028, and the Bold Economic Plan to Save Life on Earth by Jeremy Rifkin

"World Economic Forum" Davos, 1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, American Society of Civil Engineers: Report Card, autonomous vehicles, Bernie Sanders, Big Tech, bike sharing, blockchain, book value, borderless world, business cycle, business process, carbon footprint, carbon tax, circular economy, collective bargaining, corporate governance, corporate social responsibility, creative destruction, decarbonisation, digital rights, do well by doing good, electricity market, en.wikipedia.org, energy transition, failed state, general purpose technology, ghettoisation, green new deal, Greta Thunberg, high-speed rail, hydrogen economy, impact investing, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, it's over 9,000, Joseph Schumpeter, means of production, megacity, megaproject, military-industrial complex, Network effects, new economy, off grid, off-the-grid, oil shale / tar sands, peak oil, planetary scale, prudent man rule, remunicipalization, renewable energy credits, rewilding, Ronald Reagan, shareholder value, sharing economy, Sidewalk Labs, Silicon Valley, Skype, smart cities, smart grid, sovereign wealth fund, Steven Levy, subprime mortgage crisis, the built environment, The Wealth of Nations by Adam Smith, Tim Cook: Apple, trade route, union organizing, urban planning, vertical integration, warehouse automation, women in the workforce, zero-sum game

The disruption in the European power and electric utility market is going to be even more disorienting in the coming years. Already, the discrepancy between the “book value” of property, plant equipment, and goodwill and the “enterprise value” of just Europe’s leading twelve utilities is reason for concern. The market value is only 65 percent of the book value, a wide disparity, suggesting that dire losses are yet to come. With the total book value of the twelve largest utilities listed at €496 billion ($560 billion), it’s not inconceivable, according to one study, “that 300–500 billion euros of these assets are exposed to the risk of getting economically stranded.”25 Apparently much of the rest of the world has failed to heed what has taken place in the European Union.

The Firm by Duff McDonald

"World Economic Forum" Davos, Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset light, Bear Stearns, benefit corporation, book value, borderless world, collective bargaining, commoditize, conceptual framework, corporate governance, creative destruction, credit crunch, family office, financial independence, Frederick Winslow Taylor, Glass-Steagall Act, income inequality, invisible hand, Jeff Bezos, Joseph Schumpeter, Ken Thompson, Kickstarter, laissez-faire capitalism, Mahatma Gandhi, Nelson Mandela, new economy, pets.com, Ponzi scheme, Ralph Nader, risk tolerance, risk-adjusted returns, Robert Solow, scientific management, shareholder value, Sheryl Sandberg, Silicon Valley, Steve Jobs, supply-chain management, The Nature of the Firm, vertical integration, young professional

But it wasn’t until 1963 that Bower made a decision that, journalist John Huey correctly concluded, “permanently set him—and McKinsey—apart from its competitors.”3 Bower and his partners could have sold their firm at market value at the end of their careers as a way of cashing out, thereby personally reaping the rewards of their efforts. After all, at any successful firm, market value exceeds book value by a significant margin. Their contemporaries did it—the founders of George Fry & Associates and Barrington Associates both cashed out in the 1950s. McKinsey’s competitor Cresap, McCormick and Paget actually managed to sell itself twice in twelve years—first to Citicorp in 1970, and then to Towers Perrin in 1982 after having bought the firm back from Citi in 1977. Instead, Bower sold his shares back to the firm at book value. In doing so, he demonstrated precisely the kind of allegiance to the cause he expected of anyone wishing to be successful at McKinsey: He forsook considerable riches for the good of the institution, in the process giving young consultants the ability to buy their way into the partnership without mortgaging their houses to do so.

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But he also sent the message that working for McKinsey was like joining a special order of men willing to put the higher cause of the firm ahead of self-interest. Bower’s decision came as a surprise to many, including his own family. “Let me just say there was shock on people’s faces when he told us that he was selling his shares back to McKinsey at book value,” said his son Dick Bower. “It felt unbelievable, to tell you the truth. But that was Marvin for you.”4 Before Bower came along, any huckster could call himself a consultant, and many did. So Bower came up with a version of the job that drew from other real twentieth-century professions: The consultant would comport himself as a lawyer, with discretion and integrity; he would bring scientific, fact-based rigor and precision to the task, like an engineer or accountant.

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The firm did consider selling out to both the Systems Development Corporation (an air force spinoff) and the publicly traded systems analysis outfit Planning Research Corporation. But neither idea went very far. The staunch refusal of Bower and his partners to sell is quite likely the key to McKinsey’s enduring lead over its competition. Bower understood that selling shares to the public at a multiple of earnings (as opposed to selling back to his partners at book value) was a surefire way to become very, very rich. But it also created classes of haves and have-nots that most likely would eventually lead to the dissolution of the firm. That he chose not to do so is perhaps the most important road not taken in the history of the firm. John Forbis, at McKinsey from 1971 through 1983, put it simply enough: “Marvin not taking McKinsey public is like George Washington refusing the title of king—it did not match the founding principles.”31 Turnover and turmoil at those firms that did sell—Cresap was a money loser for Citibank, and Booz consultants took their firm private again in 1976 after its shares plunged—validated Bower’s vision.

Competition Demystified by Bruce C. Greenwald

additive manufacturing, airline deregulation, AltaVista, AOL-Time Warner, asset allocation, barriers to entry, book value, business cycle, creative destruction, cross-subsidies, deindustrialization, discounted cash flows, diversified portfolio, Do you want to sell sugared water for the rest of your life?, Everything should be made as simple as possible, fault tolerance, intangible asset, John Nash: game theory, Nash equilibrium, Network effects, new economy, oil shock, packet switching, PalmPilot, Pepsi Challenge, pets.com, price discrimination, price stability, revenue passenger mile, search costs, selective serotonin reuptake inhibitor (SSRI), shareholder value, Silicon Valley, six sigma, Steve Jobs, transaction costs, vertical integration, warehouse automation, yield management, zero-sum game

Subsequently, a steep run-up in research and development expenses through 1974 led to a reduced operating profit, but there was a sharp recovery in 1975. FIGURE 13.1 Polaroid’s sales and operating income, 1950–75 ($ million) The rapid, steady growth rate, combined with consistent profits, made Polaroid a Wall Street favorite. Throughout the period, the shares traded at hefty multiples of book value and earnings. Polaroid was a charter member of the “Nifty Fifty,” an elite group of firms in the late 1960s that had become the darlings of professional money managers. These companies were considered immune to the vicissitudes of a dynamic and competitive economy. Unfortunately, Polaroid’s stock price, like those of the other Nifty Fifty, declined sharply in the bear market of 1973–74.

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On these two quantitative measures, Nintendo passes the incumbent competitive advantage test, at least in the period before 1992. The stock market certainly priced Nintendo as if it owned a powerful franchise. In 1991, its market capitalization of 2.4 trillion yen (over $16 billioin in 1991 exchange rate) was ten times the book value of its equity. It had a higher market value than Sony and Nissan, firms considerably larger and more established. But if someone examined the sources of these competitive advantages in 1991, it was not at all certain that they would be sustained into the future. Captive Customers? Its large installed base of 8-bit video game consoles gave Nintendo some degree of customer captivity, due to the switching costs a customer faced once he had bought the machine.

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The reproduction cost of an asset is the cost of reproducing its economic function as efficiently as possible. For cash and marketable securities, there is no discrepancy between reported value and reproduction cost. For accounts receivable, the reproduction cost will actually be slightly higher than accounting book value. Receivables are essentially loans to customers generated by sales made in the normal course of business, and some of the loans will not be repaid. The reproduction value of inventory is the cost of producing equivalent amounts of salable inventory, which may be higher or lower than the book figure, depending on whether LIFO or FIFO accounting is being used, and on the trends in production costs.

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. Mcdonald, Patrick Robinson

"World Economic Forum" Davos, Alan Greenspan, AOL-Time Warner, asset-backed security, bank run, Bear Stearns, Black Monday: stock market crash in 1987, book value, business cycle, Carl Icahn, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, diversification, fixed income, Glass-Steagall Act, high net worth, hiring and firing, if you build it, they will come, it's over 9,000, junk bonds, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, naked short selling, negative equity, new economy, Ronald Reagan, Savings and loan crisis, short selling, sovereign wealth fund, value at risk

Glucksman seized control of the executive committee and forced several of the investment bankers to sell shares back to the corporation at book value, for immediate distribution to the traders. Fuld did well. Thanks to Glucksman’s largesse, his own share count went from 1,700 to 2,750, valued around $1,000 apiece. As your average bonus grab goes, this one went high and tight. Divisiveness and tension were rife at Lehman during this time, and by early 1984, predictably, the talent started to walk. Six prominent bankers, led by Eric Gleacher, left that spring. And, as partners, they took the firm’s capital with them, at book value—17 percent of it, straight out the door. Lew Glucksman and Dick Fuld adopted an increasingly embattled stance, detested by many of their own banking partners.

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Shearson American Express’s Peter Cohen and James Robinson were now in active talks with the Lehman executive committee. But they were shocked by the discovery of more hidden assets on the Lehman books, used to offset trading losses. In the final reckoning, the firm’s book value had fallen 33 percent. Lehman’s banking partners were afraid that even more discrepancies would be found, but Shearson wanted to buy the firm, and in the end they went to $360 million for Lehman, a $175 million premium over stated book value. Thus 132 years of Lehman history was quietly dissolved. Once the envy of Wall Street, the revered private partnership had been swallowed whole by a financial supermarket. They’d survived the Civil War and two world wars but could not survive Glucksman and Fuld.

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

Abraham Wald, activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, book value, business cycle, capital asset pricing model, carbon tax, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, currency risk, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, fail fast, fear index, financial engineering, financial innovation, global macro, illegal immigration, implied volatility, independent contractor, index fund, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market clearing, market fundamentalism, market microstructure, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, power law, pre–internet, proprietary trading, quantitative trading / quantitative finance, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stock buybacks, stocks for the long run, tail risk, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

The Summer of My Discontent It wasn’t just in Cambridge and Washington. Consider accounting numbers. Until 1970 the book value of a company, its assets minus its liabilities, corresponded pretty closely to the price of its stock. Some companies were higher and some were lower, but the average price-book ratio never got too far from 1 for long. When companies went bankrupt, creditors collected something close to book value in most cases, minus about 20 percent on average for lawyers’ fees. But starting in the 1970s and to an increasing degree thereafter, the relationship between book value and market value broke. The two are basically unrelated today; in fact, it’s rare to find a company selling near book value.

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The two are basically unrelated today; in fact, it’s rare to find a company selling near book value. And about half the time when a company goes bankrupt, recovery for creditors is near zero. That means not only does the entire net value vanish overnight, but the assets turn out to be worth close to zero. The accounting numbers are still useful as indicators, but they have long since lost any connection to tangible economic reality, to the real prices real people pay for real things. Accounting makes it all add up nicely and neatly, but what’s being added isn’t real. Now, the reason I had come to Washington was not to work on the gas-rationing plan.

The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

Alan Greenspan, asset allocation, backtesting, Benchmark Capital, Bernie Madoff, book value, buy and hold, capital asset pricing model, cognitive dissonance, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, John Bogle, junk bonds, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, Ponzi scheme, prediction markets, proprietary trading, prudent man rule, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, Tax Reform Act of 1986, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12 percent when the overall market rose or fell by 10 percent. bid-ask spread The difference between what a buyer is willing to bid (pay) for a security and the seller’s asking (offer) price. book value A company’s assets, minus any liabilities and intangible assets. book-to-market value (BtM) The book value of a company divided by its market value. broker/broker-dealer An individual or firm that buys or sells mutual funds or other securities for the public. capital gain/loss The difference between the sale price of an asset—such as a mutual fund, stock, or bond—and the original cost of the asset.

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premium An amount by which the price of a security exceeds the face value or redemption value of that security or the price of a comparable security or group of investments. It may indicate that a security is highly favored by investors. Also refers to a fee for obtaining insurance coverage. price-to-book ratio (P/B) The price per share of a stock divided by the stock’s book value (i.e., its net worth) per share. For a portfolio, the ratio is the weighted average price-to-book ratio of the stocks it holds. price-to-earnings ratio (P/E) The share price of a stock divided by its per-share earnings over the past year. For a portfolio, the weighted-average P/E ratio of the stocks in the portfolio.

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves by Andrew Ross Sorkin

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Andy Kessler, Asian financial crisis, Bear Stearns, Berlin Wall, book value, break the buck, BRICs, business cycle, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, Dr. Strangelove, Emanuel Derman, Fall of the Berlin Wall, fear of failure, financial engineering, fixed income, Glass-Steagall Act, Goldman Sachs: Vampire Squid, housing crisis, indoor plumbing, invisible hand, junk bonds, Ken Thompson, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Michael Milken, Mikhail Gorbachev, money market fund, moral hazard, naked short selling, NetJets, Northern Rock, oil shock, paper trading, proprietary trading, risk tolerance, Robert Shiller, rolodex, Ronald Reagan, Savings and loan crisis, savings glut, shareholder value, short selling, sovereign wealth fund, supply-chain management, too big to fail, uptick rule, value at risk, éminence grise

As the conversation continued, Fuld suggested that Min’s plan to pay 1.25 times book value was “too low,” instead recommending they negotiate on the basis of 1.5 times book value. McDade and McGee couldn’t believe what they were witnessing. They had spent the past two days orchestrating a deal based on spinning off the real estate assets, and now Fuld was trying to retrade on their work. Worse, a look of horror crossed Min’s face. Min pulled Barancik aside and whispered, “I’m not comfortable with this,” and in response, Barancik spoke up on behalf of KDB. He said they would only negotiate on the basis of 1.25 times the book value valuation, and then, as his aggravation mounted, started questioning Lehman’s accounting.

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The discussions seemed to be going well, except for the fact that Fuld kept calling McDade’s and McGee’s cell phones every twenty minutes to ask for an update. By the next morning, at 11:00, Min said he had received authorization for Korean regulators to make an initial offer. He said he was prepared to pay 1.25 times Lehman’s “book value”—or the value at which Lehman held its assets on its balance sheet. The deal, which was still subject to a discussion about the firm’s true book value and would have included Lehman spinning off the real estate business, meant that KDB was valuing Lehman somewhere between $20 and $25 a share, a premium over its current share price, which had closed the day before at $15.57.

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So he called up Joseph Perella, the mergers and acquisitions guru who had recently started a new firm, Perella Weinberg Partners. “Listen, I’ve got something for you,” Fuld told Perella. “You’re going to get a call from ES. Do you know him? He used to work for me.” Fuld was explicit about what he needed out of the deal. “We’re trading at about $25. Our book value is $32. We need a premium, so we’d take $35 to $40.” Perella, who assigned the project to his colleague Gary Barancik, didn’t think the odds were good. KDB was a national institution with what seemed to him to be a local charter. They had no business branching out with a risky international deal.

How to Form Your Own California Corporation by Anthony Mancuso

book value, business cycle, corporate governance, corporate raider, distributed generation, estate planning, independent contractor, information retrieval, intangible asset, passive income, passive investing, Silicon Valley

If a shareholder will purchase shares by transferring property to the corporation (we are referring to specific items of property here such as a computer system, a truck, a patent, or a copy­right; not the complete assets of a business—this latter situation is dealt with in the next example), be as specific as you can when entering the consideration (for example, “1987 Ford pickup, vehicle ID #__”), and show the fair market value of the property as the fair value of the payment. (In the case of a vehicle, Kelley Blue Book value is a good measure.) authorization of Issuance of shares Name Number of Shares Consideration Fair Value Steve Marconi and Katherine Marconi 1,000 Cash $1,000 Steve Marconi and Katherine Marconi 1,000 Cash $1,000     Steve Marconi and Katherine Marconi 1,000 Cash $1,000     Steve Marconi and Katherine Marconi 1,000 Cash $1,000     chapter 5 | steps to form your corporation | 127 Issuing Shares: A Quick Review Chapter 3 explains how to issue shares in compliance with the California limited offering exemption and federal securities laws.

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Example: If two business owners will be incorporating their pre-existing partnership, “Just Partners,” the following simple description in the consideration blank would be appro­ priate for each shareholder (each prior business owner): 128 | how to form your own california corporation “One-half interest in assets of the partnership ‘Just Partners,’ as more fully described in a bill of sale to be prepared and attached to these minutes.” You can prepare this bill of sale as part of Step 8, below. Each partner can list one-half of the dollar value of these assets (that is, one-half of their book value as reflected on a current balance sheet) as the fair value of the payment to be made by each shareholder. Issuance of Shares for Cancellation of Indebted­ ness. If shares will be issued for the cancellation of all debt the corporation owes to a shareholder, a description of the debt should be given as the consideration for the shares (for example, “cancellation of a promissory note dated ___________”).

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Typically, this provision only applies if a buyback price or procedure is not specified for a particular type of buyout covered elsewhere in the agreement (for example, it is common for agreements to 166 | how to form your own california corporation Issues Covered in Shareholder Buy-Sell Agreements (cont’d) allow the buyback of shares offered for sale by a shareholder to an outsider at the price the outsider is willing to pay). Different formulas are used, depending on the type of business and the profit history of the corporation. Agree­ ments adopted at the beginning of corporate life typically value shares at book value (the depreciated value of assets on the balance sheet of your corporation, minus liabilities). Later, after several years of continuing profits, corporations typically switch to a share valua­ tion method based upon a multiple of the corporation’s earnings (for example, the shares of a successful corporation may be valued at five times average annual earnings in the corporation’s buy-sell agree­ment).

Beyond Diversification: What Every Investor Needs to Know About Asset Allocation by Sebastien Page

Andrei Shleifer, asset allocation, backtesting, Bernie Madoff, bitcoin, Black Swan, Bob Litterman, book value, business cycle, buy and hold, Cal Newport, capital asset pricing model, commodity super cycle, coronavirus, corporate governance, COVID-19, cryptocurrency, currency risk, discounted cash flows, diversification, diversified portfolio, en.wikipedia.org, equity risk premium, Eugene Fama: efficient market hypothesis, fixed income, future of work, Future Shock, G4S, global macro, implied volatility, index fund, information asymmetry, iterative process, loss aversion, low interest rates, market friction, mental accounting, merger arbitrage, oil shock, passive investing, prediction markets, publication bias, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, robo advisor, seminal paper, shareholder value, Sharpe ratio, sovereign wealth fund, stochastic process, stochastic volatility, stocks for the long run, systematic bias, systematic trading, tail risk, transaction costs, TSMC, value at risk, yield curve, zero-coupon bond, zero-sum game

This paper explains the theory behind the building block model. Wilcox first states that Realized return = dividend yield + price change Then, he splits the “price change” term into “growth” and “valuation change,” such that Realized return = dividend yield + growth + valuation change For “growth,” he uses growth in book value. For the “valuation change” term, he calculates the change in the price-to-book ratio. Nowadays, investors use several variations of this model. For example, there are versions that use the P/E ratio, as well as different definitions for growth, such as growth in earnings, GDP, etc. There are many ways to forecast each of the components.

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This definition of sustainable growth is as basic as it gets. CFA charterholders will remember it as an important part of the program. It’s a good building block to forecast returns. Theory says that a company’s ability to grow its dividends depends on how well it can generate earnings for a given set of resources (book value), as well as how much of these earnings are reinvested in the company, presumably to finance growth projects. It’s finance 101, and again I suppose there’s nothing more practical than a good theory. In my backtests, when I replaced the economic growth model estimates with the sustainable growth rate for each country, the strategy’s performance jumped significantly.

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I had to scrub the data for outliers, especially P/E ratios and payouts around the 2000 and 2008 sell-offs, and adjust small caps data due to negative earnings, but the results were clear: P/CF won. Its average correlation with subsequent valuation changes was over 10% stronger than for the second-best ratio (P/B), and it won across seven out of nine asset classes (exceptions were small caps and non-US growth stocks).18 Cash flows are harder to “game,” or manipulate, than earnings and book values, and they’re more comparable across asset classes. In our survey process, we combine responses into the building block model, and we make the necessary adjustments for expected inflation. To finalize the forecasts, a committee of multi-asset investors as well as our group CIO will review and adjust the results.

British Rail by Christian Wolmar

accounting loophole / creative accounting, airport security, Beeching cuts, book value, Boris Johnson, COVID-19, driverless car, full employment, glass ceiling, high-speed rail, Hyperloop, Kaizen: continuous improvement, Kickstarter, vertical integration, éminence grise

The sales during the 1980s brought in just under £1.4 billion, spread over the decade, of which all but around £200 million came from property sales. Useful, but hardly enough to plug the hole in BR’s finances. Moreover, as we have seen, the proceeds invariably failed to match, let alone exceed, the book value and therefore represented a theoretical loss. The shortfall on BREL compared with the valuation in the BR accounts may have been the most significant at £75 million, but neither of the workshops sold separately, Doncaster and Horwich, achieved even half their book value. In many cases, too, the expenses involved in the process significantly reduced the profits from the sales. This was the start of the period when the use of consultants and other contracted professionals became commonplace, a phenomenon that greatly added to the costs of seeing through these deals.

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Hoverspeed was the first part of BR’s shipping business to be put up for sale, and it was bought in February 1984 for a nominal sum by its own managers, who later sold it back to Sealink after it, too, was privatized. Although the incoming Tory government had initially denied that it intended selling Sealink, the ferry business was bought by Sea Containers in July 1984 for £66 million, well short of the book value of £108 million shown in BR’s accounts. The sale of BR’s subsidiaries – and subsequent privatizations in the wider economy – was driven by ideology. The need to get maximum value for taxpayers – or, indeed, any consideration for passengers – was secondary. The railway, which had over many decades developed short sea routes as part of a very successful integrated transport system, lost these connections, which, in addition to the French and Belgian Channel ports, included links to both sides of the Irish border and the Isle of Wight.

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

"Friedman doctrine" OR "shareholder theory", "RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Alan Greenspan, asset-backed security, Bear Stearns, Bernie Madoff, Bob Litterman, book value, business cycle, buttonwood tree, buy and hold, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, diversified portfolio, do well by doing good, fear of failure, financial engineering, financial innovation, fixed income, Ford paid five dollars a day, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, junk bonds, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, managed futures, margin call, market bubble, mega-rich, merger arbitrage, Michael Milken, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, proprietary trading, risk tolerance, Ronald Reagan, Saturday Night Live, short squeeze, South Sea Bubble, tail risk, time value of money, too big to fail, traveling salesman, two and twenty, value at risk, work culture , yield curve, Yogi Berra, zero-sum game

There was also plenty of speculation about whether the $30 billion was correct, what percentage of the firm would be sold—generally thought to be between 10 percent and 15 percent—and how the proceeds of the offering would be divided up. There was also speculation about whether Goldman would trade at a premium to Morgan Stanley, which traded at four times book value, and Merrill Lynch, which traded at 3.5 times book value. With Goldman’s equity at roughly $6.3 billion, these were not idle questions, especially since the firm had had an excellent second quarter and seemed to be on track for $4 billion of pretax profits, its best year ever. Regardless of what the multiple of book value would be—4 times, or even higher—the current general partners stood to make a killing, with estimates ranging from $100 million for junior partners to more than $200 million each for Corzine, Paulson, and Roy Zuckerberg, then the longest-serving partner.

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Eleven years later, Weinberg reflected back on the 1986 partners’ meeting: “I always felt there was a terrific risk, and still do, that when you start going that way you are going to have one group of partners who are going to take what has been worked on for 127 years and get that two-for-one or three-for-one. Any of us who are partners at the time when you do that don’t deserve it. We let people in at book value, they should go out at book value.” The partners’ meeting lasted through the day and ended inconclusively. That night, the partners reassembled for a black tie party at Sotheby’s. “Each partner was engaged in a balancing act,” Endlich recounted, “an internal struggle to weigh the different factors that would affect his vote.

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Goldman believes its precision promotes transparency, allowing the firm and its investors to make better decisions, including the decision to bet the mortgage market would collapse in 2007. “Because we are a mark-to-market firm,” Blankfein once wrote, “we believe the assets on our balance sheet are a true and realistic reflection of book value.” If, for instance, Goldman observed that demand for a certain security or group of like securities was changing or that exogenous events—such as the expected bursting of a housing bubble—could lower the value of its portfolio of housing-related securities, the firm religiously lowered the marks on these securities and took the losses that resulted.

Getting to Yes: Negotiating Agreement Without Giving In by Roger Fisher, Bruce Patton

book value, cognitive dissonance, collective bargaining, rent control, sealed-bid auction, transaction costs, zero-sum game

If relying on objective standards applies so clearly to a negotiation between the house owner and a contractor, why not to business deals, collective bargaining, legal settlements, and international negotiations? Why not insist that a negotiated price, for example, be based on some standard such as market value, replacement cost, depreciated book value, or competitive prices, instead of whatever the seller demands? In short, the approach is to commit yourself to reaching a solution based on principle, not pressure. Concentrate on the merits of the problem, not the mettle of the parties. Be open to reason, but closed to threats. Principled negotiation produces wise agreements amicably and efficiently.

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Suppose, for example, your car is demolished and you file a claim with an insurance company. In your discussion with the adjuster, you might take into account such measures of the car's value as (1) the original cost of the car less depreciation; (2) what the car could have been sold for; (3) the standard "blue book" value for a car of that year and model; (4) 44 what it would cost to replace that car with a comparable one; and (5) what a court might award as the value of the car. In other cases, depending on the issue, you may wish to propose that an agreement be based upon: market value what a court would decide precedent moral standards scientific judgment equal treatment professional standards tradition efficiency reciprocity costs etc.

Quantitative Trading: How to Build Your Own Algorithmic Trading Business by Ernie Chan

algorithmic trading, asset allocation, automated trading system, backtesting, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, book value, Brownian motion, business continuity plan, buy and hold, classic study, compound rate of return, Edward Thorp, Elliott wave, endowment effect, financial engineering, fixed income, general-purpose programming language, index fund, Jim Simons, John Markoff, Long Term Capital Management, loss aversion, p-value, paper trading, price discovery process, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Ray Kurzweil, Renaissance Technologies, risk free rate, risk-adjusted returns, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, systematic trading, transaction costs

In the section on factor models earlier in this chapter, I discussed the Fama-French Three-Factor model, which suggests that return of a portfolio (or a stock) is proportional to its beta (if we hold the market capitalization and book value of its stocks fixed). In other words, you can increase return on a portfolio by either increasing its leverage or increasing its beta (by selecting high-beta stocks.) Both ways seem commonsensical. In fact, it is clear that given a low-beta portfolio and a high-beta portfolio, it is easy to apply a higher leverage on the low-beta portfolio so as to increase its beta to match that of the high-beta portfolio. And assuming that the stocks of two portfolios have the same average market capitalizations and book values, the average returns of the two will also be the same (ignoring specific returns, which will decrease in importance as long as we increase the number stocks in the portfolios), according to the Fama-French model.

Rentier Capitalism: Who Owns the Economy, and Who Pays for It? by Brett Christophers

"World Economic Forum" Davos, accounting loophole / creative accounting, Airbnb, Amazon Web Services, barriers to entry, Big bang: deregulation of the City of London, Big Tech, book value, Boris Johnson, Bretton Woods, Brexit referendum, British Empire, business process, business process outsourcing, Buy land – they’re not making it any more, call centre, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cloud computing, collective bargaining, congestion charging, corporate governance, data is not the new oil, David Graeber, DeepMind, deindustrialization, Diane Coyle, digital capitalism, disintermediation, diversification, diversified portfolio, Donald Trump, Downton Abbey, electricity market, Etonian, European colonialism, financial deregulation, financial innovation, financial intermediation, G4S, gig economy, Gini coefficient, Goldman Sachs: Vampire Squid, greed is good, green new deal, haute couture, high net worth, housing crisis, income inequality, independent contractor, intangible asset, Internet of things, Jeff Bezos, Jeremy Corbyn, Joseph Schumpeter, Kickstarter, land bank, land reform, land value tax, light touch regulation, low interest rates, Lyft, manufacturing employment, market clearing, Martin Wolf, means of production, moral hazard, mortgage debt, Network effects, new economy, North Sea oil, offshore financial centre, oil shale / tar sands, oil shock, patent troll, pattern recognition, peak oil, Piper Alpha, post-Fordism, post-war consensus, precariat, price discrimination, price mechanism, profit maximization, proprietary trading, quantitative easing, race to the bottom, remunicipalization, rent control, rent gap, rent-seeking, ride hailing / ride sharing, Right to Buy, risk free rate, Ronald Coase, Rutger Bregman, sharing economy, short selling, Silicon Valley, software patent, subscription business, surveillance capitalism, TaskRabbit, tech bro, The Nature of the Firm, transaction costs, Uber for X, uber lyft, vertical integration, very high income, wage slave, We are all Keynesians now, wealth creators, winner-take-all economy, working-age population, yield curve, you are the product

As if its privatization in 2013 was not contentious enough, the company poured fuel on the fire a few years later by selling three central London plots to developers to earn itself (and its shareholders) a tidy £400 million.5 Even after those sales, which achieved market prices of between six and eight times book value, the net book value of Royal Mail’s huge freehold estate was £845 million, suggesting a total market value upwards of £5 billion.6 The income raised by the likes of NFC and Royal Mail through such land sales can be understood as land (‘ground’) rent in capitalized form – that is, the present value of the future rental payments that the land could be expected to generate if it were let.7 For the pure land rentier, with no interest in using land for her own operational purposes, this is always the question: to let one’s property, thus earning future rents, or, effectively, to cash those future chips in now?

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As far back as 2007, it was reported that the company had been selling ‘about £100m of surplus land each year for the past five years’.10 Six years later, another report noted that a batch of further sales was expected to raise ‘more than £500m’.11 Since then, the property business – which combines site development, disposal, and letting to third parties – has continued to hum happily along, regularly posting annual profits – not revenues – in excess of £50 million: in 2016/17 the profit figure was £65 million; in 2017/18, when the company sold forty-four sites and exchanged contracts on a further five, it was £84 million.12 The most extraordinary aspect of this story is that all of this historic activity appears to have barely made a dent in National Grid’s colossal land bank, which at the time of writing still contains 645 sites with a net book value – not market value – of £2.3 billion.13 If National Grid is an infrastructure rentier, in other words, it is just as much a land rentier, and one so prodigious that it puts many of the specialist land rentiers discussed below in the shade. ____ The prominence of land rentiers is, of course, hardly a novel phenomenon in the UK.

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Like many other UK property rental businesses, Big Yellow converted to REIT status at the earliest opportunity, in 2007. The second company illustrating the ‘Other’ category is Tesco. Here, ‘last but not least’ is particularly apt: Tesco’s property portfolio is in fact more valuable than that of any of the land rentiers profiled thus far, with a net book value of some £16 billion. Certainly, Tesco is in significant measure an owner-occupier; but it is also a land rentier. For one thing, it lets, and earns substantial rents on, many of the sites it owns but which do not house a Tesco store; these number, it has been estimated, over 300.92 And then there is a more indirect form of rentierism.

A Mathematician Plays the Stock Market by John Allen Paulos

Alan Greenspan, AOL-Time Warner, Benoit Mandelbrot, Black-Scholes formula, book value, Brownian motion, business climate, business cycle, butter production in bangladesh, butterfly effect, capital asset pricing model, confounding variable, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, equity risk premium, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, it's over 9,000, John Bogle, John Nash: game theory, Larry Ellison, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Plato's cave, Ponzi scheme, power law, price anchoring, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, Richard Thaler, risk free rate, Robert Shiller, short selling, six sigma, Stephen Hawking, stocks for the long run, survivorship bias, transaction costs, two and twenty, ultimatum game, UUNET, Vanguard fund, Yogi Berra

A ratio that seems to be more strongly related to increased returns than price-to-dividends or price-to-earnings is the price-to-book ratio, P/B. The denominator B is the company’s book value per share—its total assets minus the sum of total liabilities and intangible assets, divided by the number of shares. The P/B ratio changes less over time than does the P/E ratio and has the further virtue of almost always being positive. Book value is meant to capture something basic about a company, but like earnings it can be a rather malleable number. Nevertheless, a well-known and influential study by the economists Eugene Fama and Ken French has shown P/B to be a useful diagnostic device.

Bulletproof Problem Solving by Charles Conn, Robert McLean

active transport: walking or cycling, Airbnb, Amazon Mechanical Turk, asset allocation, availability heuristic, Bayesian statistics, behavioural economics, Big Tech, Black Swan, blockchain, book value, business logic, business process, call centre, carbon footprint, cloud computing, correlation does not imply causation, Credit Default Swap, crowdsourcing, David Brooks, deep learning, Donald Trump, driverless car, drop ship, Elon Musk, endowment effect, fail fast, fake news, future of work, Garrett Hardin, Hyperloop, Innovator's Dilemma, inventory management, iterative process, loss aversion, megaproject, meta-analysis, Nate Silver, nudge unit, Occam's razor, pattern recognition, pets.com, prediction markets, principal–agent problem, RAND corporation, randomized controlled trial, risk tolerance, Silicon Valley, SimCity, smart contracts, stem cell, sunk-cost fallacy, the rule of 72, the scientific method, The Signal and the Noise by Nate Silver, time value of money, Tragedy of the Commons, transfer pricing, Vilfredo Pareto, walkable city, WikiLeaks