Investing by the Books
#52 Stephen Penman: Accounting for Value
Dec 11, 2023
Stephen Penman, Professor of accounting and security analysis at Columbia Business School and Bocconi, discusses the separation between speculation and valuation, the ideal structure of an equity research report, and how to improve as an aspiring investor. They also explore accounting arbitrage, the dangers of passive value investing, and the growing need for accounting knowledge in the finance industry.
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Quick takeaways
- Valuing a company based solely on price and speculation is unreliable; deeper analysis using financial statements is necessary.
- Separation of speculation from what you know is crucial in valuation; rely on company's financial statements and balance sheets for informed decisions.
Deep dives
The Importance of Understanding Accounting
Accounting is often overlooked or dismissed as boring, but it plays a crucial role in understanding the true value of a company. In his book, Accounting for Value, Stephen Pennman emphasizes the need to go beyond traditional valuation models and delve into the accounting details. He points out that valuing a company based solely on price and speculation is unreliable. Instead, he advocates for a deeper analysis of financial statements, balance sheets, and income statements to truly understand a company's financial health and its potential for creating value. By applying good accounting principles, investors can gain a better understanding of business fundamentals and make more informed investment decisions.
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