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Strategies & Market Trends : Value Investing

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To: Elroy who wrote (68312)8/13/2021 1:54:07 PM
From: petal2 Recommendations

Recommended By
Lance Bredvold
S. maltophilia

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Quite often these absurdly exuberant days I find that some stock has had a P/B of say, 1, for 10 years. The last year, it's 1,5. To me, that indicates quite clearly that the stock is overbid, in all probability because of too-enthusiastic newcomers (Robinhoodies and the likes).

One might reasonably draw a cut-off line at some arbitrary point and say "above this line it is not a value stock". I used to do that at 1,5x BV until I realized how dramatically (as Paul pointed out) a company can misstate it's book value.

I pretty much only care about material book value. These days, I don't even trust that number when it pops out of a computer-generated ratio though. You have to look at it yourself, and remove "fake tangibles" if they are there.

One recent example is Swedish co. Clean Motion (CLEMO). P/Tang.B is same as P/B -- 1,3. Not too expensive, right? Well, I looked at their balance sheet only 0,25 % of tangible assets are Plants, Equipment etc. The rest is "Ongoing Product Development". What is this, you may wonder? Well, in reality, it is nothing else than R&D, which is obvious from the fact that the co. is currently facing reconstruction since it turned out that no-one wanted to buy that highly speculative "product development" (it is a startup).
So 99,75 % of stated TANGIBLE book value was highly uncertain if it had ANY value whatsoever. Turns out, by the looks of it, as if it hadn't.
And this isn't even illegal; indeed, doesn't even seem to be that frowned upon. PricewaterhouseCoopers, in a blog post, suggests this course of action, noting that "for an external prospective stakeholder, the company looks better with assets on the balance sheet, than with big losses". No shit Sherlock, but is it an accurate approximation of reality? (Which is of course the supposed goal of accounting. Although to me it seems like it's often used as a tool to do as much deception as possible.

Enron and Arthur Andersen is one example of how an "esteemed" firm can turn out to do a lousy job. SEC in pretty much any situation, but especially Madoff (see this hilarious and (appalling) 10-minute 60 minutes clip w/ Markopolos on Madoff scheme youtube.com

Accounting firms such as Pwc, KPMG etc seem to me in many ways mercenaries, in the same way as S&P & Moodys provided "approval for a fee" for the housing bubble frauds. I think they don't even try to look. It's corruption, pure and simple, AFAICT. In my book anyway. The one hand knows what the other is doing, and who feeds it.
Furthermore, I think that the entire financial industry, which is so mysteriously bloated -- "why does it even exist, if it's so pointless and value-destroying?" -- exists for the sole purpose of providing an air of approval, implicit or explicit, so that if everything blows up, you can always say "we had hired gazillions of risk professionals, and they found nothing wrong with our 70x leverage!" (It's a SaaS thing -- Scapegoat as a Service.)

"Show me the incentives, and I'll show you the outcome."
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