Accounting for Value teaches investors and analysts how to handle accounting in evaluating equity investments. The book's novel approach shows that valuation and accounting are much the same: valuation is actually a matter of accounting for value.
Laying aside many of the tools of modern financethe cost-of-capital, the CAPM, and discounted cash flow analysisStephen Penman returns to the common-sense principles that have long guided fundamental investing: price is what you pay but value is what you get; the risk in investing is the risk of paying too much; anchor on what you know rather than speculation; and beware of paying too much for speculative growth. Penman puts these ideas in touch with the quantification supplied by accounting, producing practical tools for the intelligent investor.
Accounting for value provides protection from paying too much for a stock and clues the investor in to the likely return from buying growth. Strikingly, the analysis finesses the need to calculate a "cost-of-capital," which often frustrates the application of modern valuation techniques. Accounting for value recasts "value" versus "growth" investing and explains such curiosities as why earnings-to-price and book-to-price ratios predict stock returns. By the end of the book, Penman has the intelligent investor thinking like an intelligent accountant, better equipped to handle the bubbles and crashes of our time. For accounting regulators, Penman also prescribes a formula for intelligent accounting reform, engaging with such controversial issues as fair value accounting.
- Contents
- Introduction
- Chapter 1. Return to Fundamentals (and an Accounting for the History of Investment Ideas)
- Chapter 2. Anchoring on Fundamentals (and How Accounting Supplies the Anchor)
- Chapter 3. Challenging Market Prices with Fundamentals (and Deploying Accounting for the Challenge)
- Chapter 4. Accounting for Growth from Leverage (and Protection from Paying Too Much for Growth)
- Chapter 5. Accounting for Growthin the Business (and More Protection from Paying Too Muchfor Growth)
- Chapter 6. Accounting for Risk and Return (and a Remedy for Ignorance About the Cost- of- Capital)
- Chapter 7. Pricing Growth (and a Revision to Value Versus Growth Investing)
- Chapter 8. Fair Value Accounting and Accounting for Value
- Chapter 9. Adding Value to Accounting
- Chapter 10. The Intelligent Investor andthe Intelligent Accountant
- Notes
- Index
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