Value investing is struggling to remain relevant
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US Intellectual Property Investment Now Over 5% Of GDP.
Economist mentions the MS Mauboussin report on intangible we looked at in a discussion of the implications of the rise of intangible investment in terms of valuation (it has made book value a less useful gauge of value)
Intellectual property investment as a % of GDP:
Their argument on book value, “….The third aspect of intangibles to consider is their implications for investors. A big one is that earnings and accounting book value have become less useful in gauging the value of a company. Profits are revenues minus costs. If a chunk of those costs are not running expenses but are instead spending on intangible assets that will generate future cashflows, then earnings are understated. And so, of course, is book value.The more a firm spends on advertising, r&d, workforce training, software development and so on, the more distorted the picture is. The distinction between a running expense and investment is crucial for securities analysis. An important part of the stock analyst’s job is to understand both the magnitude of investment and the returns on it. This is not a particularly novel argument, as Messrs Mauboussin and Callahan point out. It was made nearly 60 years ago in a seminal paper by Merton Miller and Francesco Modigliani, two Nobel-prize-winning economists. They divided the value of a company into two parts. The first—call it the “steady state”—assumes that that the company can sustain its current profits into the future. The second is the present value of future growth opportunities—essentially what the firm might become. The second part depends on the firm’s investment: how much it does, the returns on that investment and how long the opportunity lasts. To begin to estimate this you have to work out the true rate of investment and the true returns on that investment….”
Good graph of how investment has shifted to a small number of leading firms“….The big business successes of the past decade—Google, Amazon and Facebook in America; and Alibaba and Tencent in China—have grown to a size that was not widely predicted. But there are plenty of older asset-light businesses that were built on such network effects—think of Visa and Mastercard. The result is that industries become dominated by one or a few big players. The same goes for capital spending. A small number of leading firms now account for a large share of overall investment (see chart 3)….”
Economist Staff, "Value investing is struggling to remain relevant,"The Economist, November 12, 2020, https://www.economist.com/briefing/2020/11/12/value-investing-is-struggling-to-remain-relevant