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Subject:  Re: Selecting stocks the Ben Graham way Date:  12/8/2004  8:05 PM
Author:  StarryNightShade Number:  34778 of 46922

Hi PaulEngr,

I agree that there are significant accounting rule problems associated with book value. That's why an adjusted book value should be used, but that's not so dissimilar to the problems with reported earnings, is it.

Since book value is very much related to invested capital / equity you'd have to throw "return on investment" and "return on equity" out; leaving you only with returns. You'd be left with hunches for growth rates too, since these are dependent for the most part dependent upon the ability of a company to make good investments. And without that knowledge you'd not be able to distinguish between companies that destroy value and those that create it. Why bother worrying about capital expenditures either since this part of what leads to increased book value.

It's true that the Ben Graham criteria will not select tech companies. So what? There are other ways to select tech companies that are probably more useful then BG's criteria. For one, as I wrote earlier, I do believe that R&D and similar expenditures would be better represented as "invested capital". This would definitely increase the book value of such companies. I do treat such expenditures as investments in my own analysis. It's useful as it clearly indicates things such as when a company like Intel isn't investing as much in R&D as its R&D is "amortising". It also shows the difficult that a company like Microsoft has with any kind of investment (i.e. growth opportunities).

Ben Graham had a lot more years of investing experience than me. He experienced the great declines in both the thirties and the late sixties/early seventies. He gave a lot of thought to his criteria and he discounted expectations of growth heavily. Everyone is free to heed his advice or not. But it should be noted that there is at least one resident of Nebraska that has.

In short I can't tell you that you must use book values even if you are applying the remainder of BG's criteria. That's your decision. However, I continue to see a role for book value in stock screening.


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