What is an appropriate margin of safety?

Even among value investors, there is ongoing disagreement concerning the appropriate margin of safety.



Some highly successful investors increasingly recognize the value of intangible assets.

Some highly successful investors, including Buffett, have come increasingly to recognize the value of intangible assets - broadcast licenses or soft-drink formulas, for example - which have a history of growing in value without any investment being required to maintain them.  Virtually all cash flow generated is free cash flow.



The problem with intangible assets, is that they hold little or no margin of safety. 

The most valuable assets of Dr Pepper/Seven-Up, Inc., by way of example, are the formulas that give those soft drinks their distinctive flavours.  It is these intangible assets that cause Dr Pepper/Seven-Up, Inc., to be valued at a high multiple of tangible book value.  If something goes wrong - tastes change or a competitor makes inroads - the margin of safety is quite low.



Tangible assets, by contrast, are more precisely valued and therefore provide investors with greater protection from loss.  

Tangible assets usually have value in alternate uses, thereby providing a margin of safety.  If a chain of retail stores becomes unprofitable, for example, the inventories can be liquidated, receivables collected, leases transferred, and real estate sold.  If consumers lose their taste for Dr Pepper, by contrast, tangible assets will not meaningfully cushion investors' losses.

Alternative Measures of Return on Capital

The primary measure of return on capital is return on invested capital (ROIC).


ROIC = net operating profit less adjusted taxes (NOPLAT) divided by invested capital.

ROIC correctly reflects return on capital in most cases, but special circumstances require alternative measures.



Intangible assets

More specifically, investments in intangible assets are expensed, which can introduce a negative bias in ROIC and lead managers to make incorrect decisions concerning how to create value.




Three issues to focus on handling such complexities

1.   When does ROIC accurately reflect the true economic return on capital?

• When does a more complex measure, such as cash flow return on investment (CFROI) make sense?

2.  How should one deal with investments in R&D and marketing and sales that are expensed when they are incurred?

• Creating pro forma financial statements that capitalize these expenses can provide more insight into the underlying economics of a business.

3.  How should one analyze businesses with very low capital requirements?

• Here it is recommended to use economic profit, or economic profit scaled by revenues, to measure return on capital.

Investments in R&D and other intangibles should be capitalized

Investments in R&D and other intangibles should be capitalized for three reasons:

• to represent historical investment more accurately
• to prevent manipulation of short-term earnings, and 
• to improve performance assessments of long-term investments.

These change only the perceptions of performance, however, and will not change the value of the firm.
Since free cash flow (FCF) includes both operating expenses and investment expenditures, capitalizing an expense will not affect FCF.



The process for capitalizing R&D

The process for capitalizing R&D has three steps:

• build and amortize the R&D asset using an appropriate asset life,
• make the appropriate upward adjustment on invested capital, and,
• make the appropriate upward adjustment on NOPLAT.

These adjustments can be applied to other expenses, such as an expansion of distribution routes.



Drawbacks of such adjustments

A couple of drawbacks of making too many such adjustments are

• the increased ability to manipulate short-term performance and 
• the incentives for managers not to recognize when to write down an asset created from a capitalized expense.

Warren Buffett on Economic Goodwill (Intangible asset)

WARREN BUFFETT ON ECONOMIC GOODWILL

This is what Warren Buffett calls economic good will which he explained in 1983 like this:

‘[B]usinesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return.’

Using by analogy, one of the favorite examples of Warren Buffett, take two separate companies. Company A has a net worth of $100,000, $40,000 of which is net tangible assets and $60,000 of which is intangible (brand name, goodwill, patents etc). Company B has the same net worth but $90,000 its assets are tangible. Each company earns $10,000 a year.

• So Company A is earning $10,000 from tangible assets of $40,000 and Company B is earning $10,000 from tangible assets of $90,000.

If both companies wanted to double earnings, they might have to double their investment in tangible assets. 

• For Company A to do this, it would have to spend $40,000 to add $10,000 of earnings. 
• For Company B to do this, it would have to spend another $90,000 to add $10,000 to earnings. 

All other things being equal, Company A would have better future prospects of increase in real earnings than Company B.

THE REAL PROFITABILITY OF A COMPANY

For these reasons, Warren Buffett has said that, in calculating the real profitability of a company, there should be no amortisation of economic goodwill. Does the Gillette brand name actually decrease in value each year? Of course not.

The thoughts of both Graham and Warren Buffett are worth consideration. Book value is another ingredient in the investment equation.

Benjamin Graham and Warren Buffett appear to have differences in importance on tangible and intangible assets.

The assets of a company can be either tangible or intangible and, on this point, Benjamin Graham and Warren Buffett appear to have differences in importance.

WHAT BENJAMIN GRAHAM SAID ABOUT INTANGIBLE ASSETS

‘Earnings based on these intangibles [eg goodwill] may be even less vulnerable to competition than those which require only a cash investment in productive facilities.

'Furthermore, when conditions are favorable, the enterprise with the relatively small capital investment is likely to show a more rapid rate of growth.

Ordinarily it can expand its sales and profits at slight expense and therefore more rapidly and profitably for its stockholders than a business requiring a large plant investment per dollar of sales.’ Emphasis added.

HOW WARREN BUFFETT LOOKS AT INTANGIBLE ASSETS

This last comment of Graham has importance for Warren Buffett, who seems to really like companies with valuable, and sometimes irreplaceable, goodwill. 

To Warren Buffett, it is this intangible good will, an asset that continually produces profits without the need to spend money on maintenance, upgrading or replacement, that adds value to a company. 

Consider what it is that is most important in producing profits for Coca Cola: its name and recipe, or the various factories that produce the drink.

http://www.buffettsecrets.com/book-value.htm

THE BENJAMIN GRAHAM APPROACH TO BOOK VALUE

Graham clearly considered book value an important factor in assessing share investment. He did not include intangibles in his calculations of book value and was attracted towards companies that sold at below their book value. 

This was a big factor in making a judgment about the company as an investment. He said this:

‘It is an almost unbelievable fact that Wall Street never asks, "How much is the business selling for?". Yet this should be the first question in considering a stock purchase.

'If a business man were offered a 5% interest in some concern for $10,000, his first mental process would be to multiply the asked price by 20 and thus establish a proposed value of $200,000 for the entire undertaking. The rest of his calculation would turn about whether the business was a "good buy" at $200,000.’

Graham did however acknowledge that under ‘modern conditions’ intangibles were just as much an asset as tangibles, assuming of course that a proper value could be determined. They could, in some situations, even be superior assets.

WHAT IS BOOK VALUE?

WHAT IS BOOK VALUE?

The book value of a company is generally considered its net worth; the book value per share would be the net worth of a company divided by the number of shares outstanding.

BENJAMIN GRAHAM DEFINITIONS

There is a need, in considering the book value of a company share, to know what certain terms mean - and who better to explain them than the doyen of investment analysis, Benjamin Graham. His definitions are:

Tangible assets: Assets either physical or financial in character eg plant, inventory, cash, receivables, investments.

Intangible assets: Assets which are neither physical nor financial in character. Include patents, trademarks, copyrights, franchises, good will, leaseholds and such deferred charges as unamortised bond discount.

Graham took the view in Security Analysis that intangible assets should not be taken into account when calculating book value; hence, in this sense, book value per share would be the same as net tangible assets per share (NTA) as opposed to net assets per share (NA).

So, the assets of a company can be either tangible or intangible and, on this point, Benjamin Graham and Warren Buffett appear to have differences in importance.

Characteristics of firms with Intangible Assets and their Value Drivers

Characteristics of firms with intangible assets

            While firms with intangible assets are diverse, there are some characteristics that they do have in common. In this section, we will highlight those shared factors, with the intent of expanding on the consequences for valuation in the next section.

1. Inconsistent accounting for investments made in intangible assets: Accounting first principles suggests a simple rule to separate capital expenses from operating expenses. Any expense that creates benefits over many years is a capital expense whereas expenses that generate benefits only in the current year are operating expenses. Accountants hew to this distinction with manufacturing firms, putting investments in plant, equipment and buildings in the capital expense column and labor and raw material expenses in the operating expense column. However, they seem to ignore these first principles when it comes to firms with intangible assets. The most significant capital expenditures made by technology and pharmaceutical firms is in R&D, by consumer product companies in brand name advertising and by consulting firms in training and recruiting personnel. Using the argument that the benefits are too uncertain, accountants have treated these expenses as operating expenses. As a consequence, firms with intangible assets report small capital expenditures, relative to both their size and growth potential.
2. Generally borrow less money: While this may be a generalization that does not hold up for some sub-categories of firms with intangible assets, many of them tend to use debt sparingly and have low debt ratios, relative to firms  in other sectors with similar earnings and cash flows. Some of the low financial leverage can be attributed to the bias that bankers have towards lending against tangible assets and some of it may reflect the fact that technology and pharmaceutical firms are either in or have just emerged from the growth phase in the life cycle.
3. Equity Options: While the use of equity options in management compensation is not unique to firms with intangible assets, they seem to be much heavier users of options and other forms of equity compensation. Again, some of this behavior can be attributed to where these firms are in the life cycle (closer to growth than mature), but some of it has to be related to how dependent these firms are on retaining human capital.

Companies with intangible assets: Value Drivers

Nature of intangible asset

While R&D expenses are the most prominent example of capital expenses being treated as operating expenses, there are other operating expenses that arguably should be treated as capital expenses. Consumer product companies such as Gillette and Coca Cola could make a case that a portion of advertising expenses should be treated as capital expenses, since they are designed to augment brand name value. For a consulting firm like KPMG or McKinsey, the cost of recruiting and training its employees could be considered a capital expense, since the consultants who emerge are likely to be the heart of the firm's assets and provide benefits over many years. For many new technology firms, including online retailers such as Amazon.com, the biggest operating expense item is selling, general and administrative expenses (SG&A). These firms could argue that a portion of these expenses should be treated as capital expenses since they are designed to increase brand name awareness and bring in new presumably long term customers.

Efficiency of intangible asset investments

When we capitalize the expenses associated with creating intangible assets, we are in effect redoing the financial statements of the firm and restating numbers that are fundamental inputs into valuation – earnings, reinvestment and measures of returns.

1.     Earnings: As we have noted with all three examples of capitalization (R&D, brand name advertising and training/recruiting expenses), the operating and net income of a firm will change as a consequence. Since the adjustment involves adding back the current year's expense and subtracting out the amortization of past expenses, the effect on earnings will be non-existent if the expenses have been unchanged over time, and positive, if expenses have risen over time. With Amgen, for instance, where R&D expenses increased from $663 million at the start of the amortization period to $3.03 billion in the current year, the earnings increased by more than $1.3 billion as a result of the R&D adjustment.

2.     Reinvestment: The effect on reinvestment is identical to the effect on earnings, with reinvestment increasing or decreasing by exactly the same amount as earnings.

3.     Free Cash flow to the equity(firm): Since free cash flow is computed by netting reinvestment from earnings, and the two items change by the same magnitude, there will be no effect on free cash flows.

4.     Reinvestment Rate: While the free cash flow is unaffected by capitalization of these expenses, the reinvestment rate will change. In general, if earnings and reinvestment both increase as a consequence of the capitalization of R&D or advertising expenses, the reinvestment rate will increase.

5.     Capital Invested: Since the unamortized portion of prior year's expenses is treated as an asset, it adds to the estimated equity or capital invested in the firm. The effect will increase with the amortizable life and should thererfore be higher for pharmaceutical firms (where amortizable lives tend to be longer) than for software firms (where research pays off far more quickly as commercial products).

6.     Return on equity (capital): Since both earnings and capital invested are both affected by capitalization, the net effects on return on equity and capital are unpredictable. If the return on equity (capital) increases after the recapitalization, it can be considered a rough indicator that the returns earned by the firm on its R&D or advertising investments is greater than its returns on traditional investments.

7.     Expected growth rates: Since the expected growth rate is a function of the reinvestment rate and the return on capital, and both change as a result of capitalization, the expected growth rate will also change. While the higher reinvestment rate will work in favor of higher growth, it may be more than offset by a drop in the return on equity or capital.

In summary, the variables that are most noticeably affected by capitalization are the return on equity/capital and the reinvestment rate. Since the cost of equity/capital is unaffected by capitalization, any change in the return on capital will translate into a change in excess returns at the firm, a key variable determining the value of growth.  In addition to providing us with more realistic estimates of what these firms are investing in their growth assets and the quality of these assets, the capitalization process also restores consistency to valuations by ensuring that growth rates are in line with reinvestment and return on capital assumptions. Thus, technology or pharmaceutical firms that want to continue to grow have to keep investing in R&D, while ensuring that these investments, at least collectively, generate high returns for the firm.

The Little Book of Valuation

Aswath Damodaran

Ways on Pricing a Business

Posted: Feb 14, 2011

When done properly, purchasing or selling a business can be a rewarding and fulfilling decision. There are different ways for you to do these two tasks but they both share a common issue - determining the right business selling price. It usually takes experience and skills to properly price a business.

Pricing a business for sale

When you decide to buy or sell a business, coming up with the price is one of the first tasks that you will encounter and is also among the hardest phases in the process. The truth is that there is no best way to price a business. In most cases, the final selling price depends on the seller's determination to sell and the buyer's willingness to buy the business. However, there are standard methods used in pricing a business for sale.

The market-based valuation is the first method used in pricing a business. Compared to other methods, this is probably the simplest one. Basically, the business selling price must have the same price with similar businesses that have been sold within the industry around the same area. This approach, however, does not consider the unique features of a certain company. In a manner of saying, it is a "quick and dirty" way of pricing a business for sale.

The next method in determining the business selling price called asset-based valuation. This method bases its calculations on the liquidation and book values of a particular company. This method determines the sale price of a business based on the bare minimum value, as the other important aspects, such as the customer base and brand name, are completely unaccounted for.

The last and most extensive type of business pricing method is called the earnings-based valuation. Considering the account historical, present, and future revenues and cash flows, this type of valuation calculates the business selling price most accurately, especially when used with the second valuation method.

The business selling price

Even if the three methods mentioned above give accurate results, the actual business selling price can still fluctuate depending on a number of factors that can be easily quantified. When the price you set is too high, it can discourage prospective buyers and may stain the business' reputation if it stays in market for a long period of time. On the other hand, you may also lose a large amount of money if you put a business on sale for a very low amount.

The intangible value of businesses is the main reason why a business selling price fluctuates. For example, an entrepreneur sells a reputed online company with a few 'hard assets'. If he disregards the value of those intangible assets, the price would significantly decrease and it would be a disastrous mistake on his end. Note that in a lot of cases, the value of intangible assets can cover up to 95 percent of the final selling price.

Other than the challenging assessment of intangible assets, another important factor in making business decisions is not letting your emotions get in the way. You may think that buying a reputed bakery franchise is a smart financial move, but are you sure you are ready to begin operations at 3 in the morning?

The same warning goes to sellers who are pricing a business for sale. It is normal to feel emotionally attached to a company that you once owned, but be professional enough not to show any emotion when discussing a business selling price. Remember that you should avoid over or under valuation of your company. Knowing the different ways of how to determine business sale prices, do you now agree that it is not such a difficult task after all?



http://www.articlesbase.com/entrepreneurship-articles/ways-on-pricing-a-business-4225431.html#ixzz1E2MatFpg

What Is Intangible Asset Valuation?

Intangible asset valuation is the method by which accountants determine the effect of an intangible asset on the company’s balance sheet. Unlike other accounting procedures, determining the transactional value of an intangible asset is an arduous process. Intangible assets include both intellectual property, such as grants, logos or trademarks, as well goodwill from buying another company. Intangible asset valuation requires both legal and financial analysis.
http://www.wisegeek.com/what-is-intangible-asset-valuation.htm

Value Investing is a time tested investment strategy that works in most market environments.

Value investing is finding a good quality stock that you are proud to own for an inexpensive or bargain price.

Basically, a value stock has a low price to book value and a low price to earnings ratio. In determining whether a stock is inexpensive or not, one needs to analyze the company’s book value, also known as shareholders’ equity. You need to determine what the true net worth of a company is by calculating a tangible book value.

It’s critical to pick a company with an excellent management team.

http://myinvestingnotes.blogspot.com/2010/07/characteristics-of-value-stocks_23.html

****Know your company to stay Streets ahead

The management thinking can be best understood by reading the management discussion and analysis mentioned in the annual report. One can start with reading three year’s annual reports. This will allow you to compare the management analysis from past reports with what really transpired in the following year. The next important thing that will help you is the corporate governance details in the annual report.

“Management’s intentions towards the minority shareholders must be carefully understood,” advises Kunj Bansal, chief investment officer of Sanlam SMC India. If the business has just been sold, the promoters collecting a non-compete fee does not bode well for smaller shareholders.

Some investors find buy back programmes done at suppressed stock prices and unrelated diversifications detrimental to the minority shareholders. Management actions in the past while handling surplus cash can be good signalling device. One quantitative element that comes handy is the quantum of management compensation. One can look at payout to the management as a percentage of the net profit and decide if the management is fair.

Related Party Transactions

Good companies do business with related parties at fair market prices. The same is disclosed in the annual report for the benefit of the shareholders. Few related party transactions, along with high transparency, is an indicator of a good business. Promoters’ presence in the same business through a privately-held entity is a clear dampener as the investor in the publicly-listed entity runs the risk of promoter placing the ‘cream business’ in the privately-held entity.
Business model

Simply put, it means where and how the company earns its bread and butter. You have to figure out what products the company produces or markets. Five Ws — who, when, where, what, why, will help you understand the raw materials that go in, the time and skill set required, the risks faced by the company and probably all those variables that can influence your returns as a shareholder.

During tech boom of 2000, investors poured in their hard earned money into hundreds of dotcom companies. A few avoided these companies as they found that there were no meaningful revenues or they were bleeding at operational level. Undoubtedly those who stayed clear of that boom were the eventual winners. A thorough understanding of the business can help determine the potential of business and the risks the business is subject to.

Pricing Power

If you grasp the business model well, you stand to understand the pricing power. Customers and suppliers can influence the profit if they possess the pricing power. Generally, businesses with a few customers or sole suppliers typically do not have pricing power. Hence it makes sense to stay with companies that have a large customer base and have many suppliers and still a monopoly player in the business.
Power of intangibles

Intangibles such as brands play a significant role in the performance of a company. In the long-run, consumer preferences tilted in favour of a brand can bring in high visibility of income for a business. Intellectual property rights are also important as they offer an edge over others. They become the deciding factors in the knowledge-driven businesses.

“Investors must check the ownership of such intangibles. If the promoters own the brands in the personal capacity, then it is a case of promoters making money at the expense of the shareholders,” says Avinash Gorakshkar. This is especially true if the business is doing well, as the promoter can take home a sizeable amount of profits by way of higher fees.

Point of Reference:  Information Sources

Company annual reports:

--> An annual communication to shareholders

--> Available to all shareholders

--> High authenticity

--> Good companies also keep them on their websites

Broker reports:

--> Prepared by brokers to solicit business and advise clients

--> Can be helpful in understanding micro or company-specific issues

--> May contain scenario analysis that exhibits impacts of changes in fundamentals
Company presentations:

--> These are prepared by companies from time to time

--> Meant for analysts and give update on business

--> You have to discount the contents as company may paint an overoptimistic picture

--> Available on company websites

Industry reports:

--> Prepared by consulting firms and industry bodies such as FICCI

--> Offers good business insights

--> Useful in tracking changes in regulatory, technological changes

--> Available on websites of industry bodies or websites of manufacturers

--> You have to discount the interested parties' views
Stock exchange filings:

--> Periodic communications by the company

--> High authenticity

http://economictimes.indiatimes.com/quickiearticleshow/6407657.cms

Buffett (1983): Great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets.

While corporate excesses and the concept of economic earnings, different from accounting earnings remained the focal points in the master's 1982 letter to shareholders, let us see what Warren Buffett has to offer in his 1983 letter.

In this another enlightening letter, Warren Buffett, probably for the first time discussed at length the concept of 'goodwill' and believed it to be of great importance in understanding businesses. Further, he blames the discrepancies between the 'actual intrinsic value' and the 'accounting book value' of Berkshire Hathaway to have arisen because of the concept of 'goodwill'. This is what he has to say on the subject.

"You can live a full and rewarding life without ever thinking about goodwill and its amortization. But students of investment and management should understand the nuances of the subject. My own thinking has changed drastically from 35 years ago when I was taught to favor tangible assets and to shun businesses whose value depended largely upon economic goodwill. This bias caused me to make many important business mistakes of omission, although relatively few of commission."

From the above quote, it is clear that the master's investment philosophy had undergone a sea change from when he first started investing. Further, with his company becoming too big, he could no longer afford to churn his portfolio as frequently as before. In other words, he wanted businesses where he could invest for the long haul and what better investments here than companies, where the economic goodwill is huge. The master had been kind enough in explaining this concept at length through an appendix laid out at the end of the letter. Since we feel that we couldn't have explained it better than the master himself, we have reproduced the relevant extracts below verbatim.

"True economic goodwill tends to rise in nominal value proportionally with inflation. To illustrate how this works, let's contrast a See's kind of business with a more mundane business. When we purchased See's in 1972, it will be recalled, it was earning about US$ 2 m on US$ 8 m of net tangible assets (book value). Let us assume that our hypothetical mundane business then had US$ 2 m of earnings also, but needed US$ 18 m in net tangible assets for normal operations. Earning only 11% on required tangible assets, that mundane business would possess little or no economic goodwill.

A business like that, therefore, might well have sold for the value of its net tangible assets, or for US$ 18 m. In contrast, we paid US$ 25 m for See's, even though it had no more in earnings and less than half as much in "honest-to-God" assets. Could less really have been more, as our purchase price implied? The answer is "yes" - even if both businesses were expected to have flat unit volume - as long as you anticipated, as we did in 1972, a world of continuous inflation.

To understand why, imagine the effect that a doubling of the price level would subsequently have on the two businesses. Both would need to double their nominal earnings to $4 million to keep themselves even with inflation. This would seem to be no great trick: just sell the same number of units at double earlier prices and, assuming profit margins remain unchanged, profits also must double.

But, crucially, to bring that about, both businesses probably would have to double their nominal investment in net tangible assets, since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad. A doubling of dollar sales means correspondingly more dollars must be employed immediately in receivables and inventories. Dollars employed in fixed assets will respond more slowly to inflation, but probably just as surely. And all of this inflation-required investment will produce no improvement in rate of return. The motivation for this investment is the survival of the business, not the prosperity of the owner.

Remember, however, that See's had net tangible assets of only $8 million. So it would only have had to commit an additional $8 million to finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over twice as large - a need for $18 million of additional capital.

After the dust had settled, the mundane business, now earning $4 m annually, might still be worth the value of its tangible assets, or US $36 m. That means its owners would have gained only a dollar of nominal value for every new dollar invested. (This is the same dollar-for-dollar result they would have achieved if they had added money to a savings account.)

See's, however, also earning US$ 4 m, might be worth US$ 50 m if valued (as it logically would be) on the same basis as it was at the time of our purchase. So it would have gained US$ 25 m in nominal value while the owners were putting up only US$ 8 m in additional capital - over US$ 3 of nominal value gained for each US $ 1 invested.

Remember, even so, that the owners of the See's kind of business were forced by inflation to ante up US$ 8 m in additional capital just to stay even in real profits. Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least.

And that fact, of course, has been hard for many people to grasp. For years the traditional wisdom - long on tradition, short on wisdom - held that inflation protection was best provided by businesses laden with natural resources, plants and machinery, or other tangible assets. It doesn't work that way. Asset-heavy businesses generally earn low rates of return - rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses.

In contrast, a disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets. In such cases earnings have bounded upward in nominal dollars, and these dollars have been largely available for the acquisition of additional businesses. This phenomenon has been particularly evident in the communications business. That business has required little in the way of tangible investment - yet its franchises have endured. During inflation, goodwill is the gift that keeps giving.

But that statement applies, naturally, only to true economic goodwill. Spurious accounting goodwill - and there is plenty of it around - is another matter. When an overexcited management purchases a business at a silly price, the same accounting niceties described earlier are observed. Because it can't go anywhere else, the silliness ends up in the goodwill account. Considering the lack of managerial discipline that created the account, under such circumstances it might better be labeled 'No-Will'. Whatever the term, the 40-year ritual typically is observed and the adrenalin so capitalized remains on the books as an 'asset' just as if the acquisition had been a sensible one."

http://www.equitymaster.com/detail.asp?date=8/9/2007&story=3

Value Investing: Focus on Intangibles

Today's value investors are as intently focussed on business intangibles, like brand and customer loyalty, as on the "hard" financials.

It is all about looking at what's behind the numbers, and moreover, what will create tangible value in the future.

So a look at the market or markets in which the company operates is important.

Therefore, it is so important to look at:

• products,
• market position,
• brand,
• public perception,
• customers and customer perception,
• supply chain,
• leadership,
• opinions, and
• a host of others factor.