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Hi Chuck,

X is not actually a criteria. Rather, it is a premium to the BI price. BI is based on GAAP accounting measures like book value and ROE. Since the accounting system has no way of putting a value of the intellectual capacity of company, then the less the company relies on physical assets, the more BI will understate its actual value. So, in the past MSFT has been a BI pick. Well, when it was below its BI, I would argue it was WAY below its actual value, not "just" below.

So, if company ABC generates a lot of revenues from the knowledge of its employees (i.e. MSFT), then maybe it does not need to be below its BI, but rather maybe BI + 20% for instance to actually be cheap. This may compensate for the fact that BI may underestimate the value. Or, maybe not. It is just a thought.

I hope I did not confuse you too much : )


John Del Vecchio
Investment Research Fool
The Motley Fool
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