It is now more than 20 years since the Nasdaq, an index of technology shares, crashed after a spectacular rise during the late 1990s. The peak in March 2000 marked the end of the internet bubble. The bust that followed was a vindication of the stringent valuation methods pioneered in the 1930s by Benjamin Graham, the father of “value” investing, and popularised by Warren Buffett. For this school, value means a low price relative to recent profits or the accounting (“book”) value of assets. Sober method and rigour were not features of the dotcom era. Analysts used vaguer measures, such as “eyeballs” or “engagement”. If that was too much effort, they simply talked up “the opportunity”.
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This would be comforting. It would validate a particular approach to valuing companies that has been relied upon for the best part of a century by some of the most successful investors. But the uncomfortable truth is that some features of value investing are ill-suited to today’s economy. As the industrial age gives way to the digital age, the intrinsic worth of businesses is not well captured by old-style valuation methods, according to a recent essay by Michael Mauboussin and Dan Callahan of Morgan Stanley Investment Management.
The job of stock picking remains to take advantage of the gap between expectations and fundamentals, between a stock’s price and its true worth. But the job has been complicated by a shift from tangible to intangible capital—from an economy where factories, office buildings and machinery were key to one where software, ideas, brands and general know-how matter most. The way intangible capital is accounted for (or rather, not accounted for) distorts measures of earnings and book value, which makes them less reliable metrics on which to base a company’s worth. A different approach is required—not the flaky practice of the dotcom era but a serious method, grounded in logic and financial theory. However, the vaunted heritage of old-school value investing has made it hard for a fresher approach to gain traction.
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In Graham’s day the backbone of the economy was tangible capital. But things have changed. What makes companies distinctive, and therefore valuable, is not primarily their ownership of physical assets. The spread of manufacturing technology beyond the rich world has taken care of that. Any new design for a gadget, or garment, can be assembled to order by contract manufacturers from components made by any number of third-party factories. The value in a smartphone or a pair of fancy athletic shoes is mostly in the design, not the production.
In service-led economies the value of a business is increasingly in intangibles—assets you cannot touch, see or count easily. It might be software; think of Google’s search algorithm or Microsoft’s Windows operating system. It might be a consumer brand like Coca-Cola. It might be a drug patent or a publishing copyright. A lot of intangible wealth is even more nebulous than that. Complex supply chains or a set of distribution channels, neither of which is easily replicable, are intangible assets. So are the skills of a company’s workforce. In some cases the most valuable asset of all is a company’s culture: a set of routines, priorities and commitments that have been internalised by the workforce. It can’t always be written down. You cannot easily enter a number for it into a spreadsheet. But it can be of huge value all the same.
A beancounter’s nightmare
There are three important aspects to consider with respect to intangibles, says Mr Mauboussin: their measurement, their characteristics, and their implications for the way companies are valued. Start with measurement. Accounting for intangibles is notoriously tricky. The national accounts in America and elsewhere have made a certain amount of progress in grappling with the challenge. Some kinds of expenditure that used to be treated as a cost of production, such as r&d and software development, are now treated as capital spending in gdp figures. The effect on measured investment rates is quite marked (see chart 2). But intangibles’ treatment in company accounts is a bit of a mess. By their nature, they have unclear boundaries. They make accountants queasy. The more leeway a company has to turn day-to-day costs into capital assets, the more scope there is to fiddle with reported earnings. And not every dollar of r&d or advertising spending can be ascribed to a patent or a brand. This is why, with a few exceptions, such spending is treated in company accounts as a running cost, like rent or electricity.
The treatment of intangibles in mergers makes a mockery of this. If, say, one firm pays $2bn for another that has $1bn of tangible assets, the residual $1bn is counted as an intangible asset—either as brand value, if that can be appraised, or as “goodwill”. That distorts comparisons. A firm that has acquired brands by merger will have those reflected in its book value. A firm that has developed its own brands will not.
The second important aspect of intangibles is their unique characteristics. A business whose assets are mostly intangible will behave differently from one whose assets are mostly tangible. Intangible assets are “non-rival” goods: they can be used by lots of people simultaneously. Think of the recipe for a generic drug or the design of a semiconductor. That makes them unlike physical assets, whose use by one person or for one kind of manufacture precludes their use by or for another.
In their book “Capitalism Without Capital” Jonathan Haskel and Stian Westlake provided a useful taxonomy, which they call the four Ss: scalability, sunkenness, spillovers and synergies. Of these, scalability is the most salient. Intangibles can be used again and again without decay or constraint. Scalability becomes turbo-charged with network effects. The more people use a firm’s services, the more useful they are to other customers. They enjoy increasing returns to scale; the bigger they get, the cheaper it is to serve another customer. 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).
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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 world of investing normally sees experts telling us the “right” way to manage our money. How often do these experts pull back the curtain and tell us how they invest their own money? Never. How I Invest My Money changes that. In this unprecedented collection, 25 financial experts share how they navigate markets with their own capital. In this honest rendering of how they invest, save, spend, give, and borrow, this group of portfolio managers, financial advisors, venture capitalists and other experts detail the “how” and the “why” of their investments.

Yet in recent decades, Boeing — like so many American corporations — began shoveling money to investors and executives, while shortchanging its employees and cutting costs.

Almost 80 percent of chief financial officers at 400 of America’s largest public companies say they would sacrifice a firm’s economic value to meet the quarter’s earnings expectations. ... (This dynamic backfired at Wells Fargo, where employees pressured to meet quarterly targets opened accounts without customers’ permission.)

There is a real possibility real estate could be one of the dominant assets of the 2020s. Here are some reasons why:
Millennials. Young people are settling down later in life because they are going to school for longer, had to deal with a housing bust, and graduated in and around the Great Financial Crisis. But millennials were going to begin doing adult things eventually.
That means buying houses, even if it comes later in life than it did for their parents. Millennials are now the biggest demographic in the country and will dominate the most common ages in the country for years to come:

Why it matters: The Treasury secretary wields enormous power in policy on regulations, taxes and the broad economy. Their actions can either reassure and spook financial markets. (Remember Mnuchin's infamous call with the big banks?)
"Investors shouldn’t worry that [Yellen] will make off-the-cuff remarks that will spur volatility. She’s the ultimate steady hand," Ian Katz, a financial policy analyst at Capital Alpha Partners, said in a note.
"While she isn’t the kind of hands-off free-marketeer that investors would prefer if they had the choice, she isn’t going to make markets nervous."

Insurance companies are essentially financial institutions: They take in money and dole out money, just like a bank does. (Many insurance companies are even branches of large banking conglomerates.) Also, like a bank, they invest the money of its customers and policyholders in interest-earning investments. While the shared risk approach allows for large sums of cash on hand for claims payouts, investments are a long-term financial strategy, to make sure that the insurance company will have cash on hand for payouts years down the line.

The auto industry is roaring back far sooner than expected, in the latest sign of the economy's two-track recovery. Major auto manufacturers have been raking in money this past quarter, as consumers who can afford it show unexpectedly strong appetite for expensive new vehicles.
Companies like Ford, General Motors, Fiat Chrysler, Daimler and BMW reported impressive earnings in the period between July to September, surpassing their pre-pandemic performance in many key metrics. Honda and Toyota raised their profit forecasts sharply. It's a remarkable turnaround for an industry that, just a few months ago, was facing a grim outlook. Plants around the world were shut down this spring to stop the spread of the coronavirus.
Carmakers couldn't sell vehicles, because they weren't making any. They were bleeding billions of dollars, and bracing for a recession that would send demand for their products plummeting even after they restarted assembly lines. But then production resumed. And it turns out Americans — those who can still afford new cars, anyway — want new vehicles as badly as ever. Pent-up demand from people who put off purchases earlier in the pandemic was boosted even further by federal stimulus checks and low interest rates.
"Consumers have proved resilient," says Stephanie Brinley, an analyst with IHS Markit. "They came back to the showrooms as soon as they could."
It might seem counter-intuitive. Millions of Americans are struggling financially. The U.S. has recovered just over half of the 22 million jobs lost early in the pandemic. But those job losses disproportionately hit lower-income workers, particularly in service industries, and new cars are marketed to higher-earning buyers. The stock market has been soaring, and many well-compensated workers have been able to work from home.
Instead of experiencing a financial crunch, they might even be saving money by reducing expenditures on things like travel and dining out.
The spending power of the financially comfortable is powering sales trends in high-end homes as well as new cars.
Indeed, those buyers showed a strong preference for pricey pick-up trucks and SUVs loaded with premium features, pushing new car transaction prices higher. That's a long-standing trend in American car buying, but it may have been intensified by the pandemic, as financially secure shoppers are less focused on commuter vehicles and thinking more about road trips or leisure.
The preference for high-cost vehicles means automakers can turn tidy profits even on a smaller number of total sales. Meanwhile, some companies are also seeing a boost from rising used car prices, which provided a cash infusion to their financing arms. Demand in China has also rebounded significantly.
The result? Ford paid back $15 billion it had borrowed to make it through the pandemic and still had $30 billion in cash left over. General Motors doubled analyst expectations for earnings-per-share in the third quarter. And Fiat Chrysler reported its highest ever quarterly earnings in North America.
Brinley notes that sales will still be down for the year as a whole, and given the uncertainty about the ongoing pandemic, "there is still opportunity to have difficulty in the next year."
But the unexpectedly strong performance from automakers in the third quarter helps make up for the losses they suffered earlier in the year. And it's a relief for automakers as they look toward the future, where they have committed to make hefty investments.
Every major car company is banking on a future in battery-powered vehicles, which requires an expensive transformation in their industry. And that's before you tally up the costs of investing in autonomous vehicles.
GM CEO Mary Barra emphasized this week that the tremendous amount of cash that GM was earning from full-size trucks and SUVs in North America will allow the company to self-fund its electric vehicle investments, rather than needing to borrow money or seek investors. "We're going to go hard at [electric vehicles]," she said. "The North America performance ... allows us to do that."
Meanwhile, Tesla, which led the industry in electrification and is popular with luxury car customers, was profitable all year long.

Why does this sound like teenager saying they don't believe in Santa Claus?