Saturday, 10 March 2012

A distinction between deep value and surface value. Deep value is independent of market price.

The term "investment value" refers to the concept of pure, true, intrinsic, economic value. 

  • The phrase "expected investment value" refers to investment value adjusted for risk and uncertainty
  • Economic valuation is the estimation of economic value.

Even with all these qualifying adjectives to clarify the meaning, the phrase is awkward and remains ambiguous. A less ambiguous distinction is between deep value and surface value. 

Deep value is investment value based primarily on intrinsic economic value estimated from expected future discounted cash flows and buttressed by accounting book value, quality and other aspects of value independent of market price. 
  • Deep intrinsic value can include qualitative factors such as brand recognition, franchise, corporate governance, labor relations, government contracts and assets that are not usually marked to market. 
  • A corporate governance score such as Standard & Poor's CGS [PDF or HTML] use criteria that may be indicators of long-term value creation, including both a Corporate Governance Score for a company and a separate Country Governance Classification for its country of origin. 
  • The criteria are fairness, transparency, accountability and responsibility, as elaborated in Standard & Poor's Corporate Governance Scores: Criteria, Methodology and Definitions, July, 2002. 
Surface value is a misnomer -- it is not really value but rather market price, usually expressed as a ratio either with accounting items such as earnings, dividends, net worth, and sales, or with growth rate. 

  • Surface value is analogous to unit pricing of fungible commodities by number, by volume, and by weight, for comparison shopping without regard to quality.

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