Right now I'm reading The Essential Buffett.
I'm just in the part on Graham and his ideas on the intrinsic value of a company. He says that more emphasis should be placed on book value, rather than intangibles such as management capability or the nature of the business. His argument is logical: quantitative analysis (assets, liabilities, earnings, etc.) are definite and measurable, intangibles are not, and therefore a significant risk is assumed when one attempts to quantify the intangibles' value.
Today, there is certainly more emphasis placed on the intangibles than on the quantitative data by most "investors." Graham says that when this is so, "they will bid up the price and hence the price to earnings ratio. As more and more investors become enamored with the promised return, the price lifts free from underlying value and floats freely upward, creating a bubble that expands beautifully until it finally must burst." This would explain why many great investors (Graham, Lynch, Buffett) like companies in boring industries that are unlikely to catch popular "investor" attention. An extra risk is inherent in a company that is liked by the public. This risk stems from over optimism and the illogical "investing" public, who are willing to bid the price up to unreasonable levels in the hopes of making a good deal of money in a short amount of time.
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