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 finance-the
cost-of-capital, the CAPM, and discounted cash flow
analysis-Stephen 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.
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