Accounting for Value
By: Stephen Penman
Published: December 23, 2010
Format: Hardcover, 264 pages
ISBN-10: 0231151187
ISBN-13: 978-0231151184
Publisher: Columbia University Press
"Valuation is a set of methods for determining the appropriate price to pay for a firm. Accounting is a set of methods for producing the information for the determination" writes George O. May Professor and Morgan Stanley Research Scholar at the Graduate School of Business, Columbia University, Stephen Penman, in his accessible and common sense based book Accounting for Value. The author describes how valuation is really the same as accounting for value for assessing the evaluation process of equity investments.
Stephen Penman recognizes that there are many evaluation tools and methods for establishing equity investment valuations. Those techniques include the popular tools of modern finance such as the cost-of-capital, the CAPM, and discounted cash flow analysis. For the purposes of this book, and for creating clarity for the investor, Stephan Penman dispenses with those approaches. In their place, the author returns to the basic principles of value investing based on common sense. The author's methodology offers an understandable set of principles that are accessible to any investor, regardless of experience and sophistication. Stephen Penman develops the concept of establishing an appropriate value to avoid paying too much for any equity investment; and for forecasting the expected return on investment from purchasing for growth.
Stephen Penman (photo left) presents the important connection between valuation and accounting, and offers the powerful insight that the two concepts represent close to the same thing. Put another way, valuation is at its core, accounting for value. With this concept in place, and understood by the investor, Stephen Penman provides the basic and common sense tools for avoiding overpayment for any equity investment. With a firm grasp of accounting for value investing, the investor will understand the following:
* Price is what you pay, but value is what you get
* The real investment risk is the risk of paying too much
* Base investments on what you know and not on speculation
* Avoid overpaying for speculative growth
For me, the power of the book is how Stephen Penman provides an understandable and effective method for valuating potential investments. The key to his straightforward concept is the connection between valuation and accounting. Instead of presenting the usual, and very often confusing tools of modern finance, the author offers the logical, and time proven principles of value investing. Stephen Penman brings the legendary Benjamin Graham school of value investing into today's market by recognizing that there are not only changes in the economy, but in accounting and modelling of finance as well.
Stephen Penman also combines the critical accounting basics of the balance sheet with the income statement to apply accounting for value. Not only will this approach uncover fresh investment opportunities, but also reduces the risk of overpaying for the equity. The entire premise of the book is to have investors thinking like accountants, and the author is very effective in achieving this objective.
I highly recommend the essential and fundamentals oriented book Accounting for Value by Stephen Penman, to anyone who is serious about investing in sound, fundamental stocks. This book will benefit the beginning or experienced investor, accountants, and anyone interested in the coupling of accounting with equity valuation.
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