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Accounting for Value
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This book shows investors and analysts how to handle accounting in evaluating equity investments. Penman takes a novel approach to valuation by showing that valuation and accounting are much of the same thing: valuation is actually a matter of accounting, a matter of accounting for value. Penman lays aside many of the tools of modern finance--the cost-of-capital, the CAPM, discounted cash flow analysis--that are the modernist's attempt to quantify investing. He finds them too imprecise when putting one's money at risk. Though retaining many of the economic principles on which modern finance is built, he provides an alternative quantification by returning to the common-sense principles that have always guided fundamental investors: 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; beware of paying too much for speculative growth. The book operationalizes these ideas with the quantification supplied by accounting to produce practical tools for the game that Benjamin Graham's "intelligent investor" plays with price?for the negotiation with Mr. Market, as Graham would say. Accounting for value informs the investor of the growth forecasts Mr. Market is making to arrive at his price. Accounting tools are then deployed to challenge that forecast. Aware of the risk of paying too much for growth, an accounting for value provides protection and tells the investor the likely return from buying growth. Strikingly, the analysis finesses the need to calculate a "cost-of-capital," the problem that so frustrates the application of modern valuation techniques. The analysis confronts "value" versus "growth" investing as being too simple and indeed misguided about the risk in buying growth. And it explains such curiosities as why earnings-to-price and book-to-price predict stock returns. By the end of the book, Penman has the intelligent investor thinking as an intelligent accountant, as an investor who intelligently accounts for value, one better equipped to handle the bubbles and crashes of our time. Penman also has a prescription for intelligent accounting, engaging the accounting issues of our time, including the controversy over fair value accounting. The book is a conversation with investors about accounting and valuation, but one that regulators who prescribe accounting for the investor might well listen in on.
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This book cleverly weaves together important but otherwise unreconciled themes, enhancing our conceptual understanding of the nature and usefulness of accounting in valuation. Stephen Penman also updates the Benjamin Graham school of investment thought by incorporating changes in the economy, accounting, and financial modeling. -- Stephen Ryan, New York University, Stern School of Business Accounting for Value is a thoughtful yet widely accessible discourse on how accounting facilitates valuation. It is a gold mine of ideas for investors, academics, and market regulators and establishes Stephen Penman as the modern day standard bearer of the Graham School of Fundamental Investing. Anyone who cares about the role of accounting in this increasingly complex world should read this book. -- Charles M. C. Lee, Joseph McDonald Professor of Accounting, Stanford University In his latest book, Stephen Penman displays his mastery of the language of accounting through an integrated view of the interactions of company balance sheets and income statements. This approach allows an investor to more effectively 'account for value' and identify opportunities in the capital markets. -- Mitchell R. Julis, cochairman and co-CEO, Canyon Partners, LLC

Table of 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 Growth in the Business (and More Protection from Paying Too Much for 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 and the Intelligent Accountant

About the Author

Stephen Penman is George O. May Professor of Accounting and Morgan Stanley Research Scholar at the Columbia Business School. He is the author of Financial Statement Analysis and Security Valuation, for which he received a Wildman Medal Award, and an editor of the Review of Accounting Studies.

Reviews

Penman's book...contains gems on every page - to the point that no one who deals with the market in any capacity should pass by this text until they have committed to memory as many points therein as their limited, mark one, human brains, can hold. -- Anthony Harrington QFinance Blog 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. Blog Business World For a practical book that will help you understand the use of accounting in understanding stock valuation, Accounting for Value is the resource you are looking for you. Stocker Blog

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