Stock-valuation

What drives stock markets? Earnings. Can you look at current earnings to predict future price changes? No, current earnings are already reflected in the stock price. You must look at the estimates of future earnings in order to predict price changes. This book is a MUST READ for anyone who invests as it covers every seminal article written on the subject of using earnings estimates. Brian Bruce, who hosts an annual conference on the subject, is a leader in the field and has chosen the best of the best articles.

Doesn't this book sound like a battle plan for investment success, maybe one filled with value-based accounting lessons? It's not.

In fact, we are spared math, and we are not given practical counsel, either. That was what I looking for, as the title suggests. The title should be How Can The Smart Money Be So Dumb.

Instead, this is an interesting run-through of recent horror stories on Wall Street from the Internet bubble to IPO's to pro forma accounting and Enron. Behavioral finance is discussed here, but Why Smart People Make Big Money Mistakes by Gary Belsky and Thomas Gilovich is far superior.

Or read Buffett: The Making of an American Capitalist by Roger Lowenstein. Or John Neff On Investing instead.

Mr. Cunningham is one of the new wave of Buffett explainers. (Where were you people 15 years ago when there was money to be made buying Berkshire?) And why does someone so incisive, so downhome funny as Mr. Buffett need so much explanation?? (Try Cunningham's The Essays of Warren Buffett: Lessons for Corporate America or the Berkshire Hathaway annual report.)

Unfortunately, the author lets slip his idea of a five-year holding period for stocks. That may turn out to be good advice, but which stocks would he choose to hold? We have no idea. (Tech stocks, big winners 2 years ago, have crashed back down to their 1997 prices. And non-tech Walt Disney is well below its 1997 prices.)

I think Mr. Cunningham is an extremely brave and patient investor.

I read Cunningham's book based on the review in Barron's rounding up the best investment books of 2002. They were right. The book is a eye-opening intro to the psychology of investing, important to investors and market observers/regulators. (Cunningham's other books have more of the basics for investors--also very good books.)

Awesome. Cunningham dissects the woes besetting corporate American using lucid, concrete examples, with boundless energy and enthusiasm, endorsed properly on the back cover by those who take behavioralism seriously, including Gary Belsky, who wrote the top-seller "Why Smart People Make Big Money Mistakes" (which is about general habits, not investment philosophy of which Cunningham writes) and Robert Hagstrom, prolific author (who writes about investment philosophy, and sometimes behavioralism). What an astonishing record Cunningham has developed as a writer and expert in invesetment theory and practice! A better title for this book would be Rational Investing in a Hair Brained Environment; the one chosen is unduly flashy for the seriousness of Cunningham's pursuits (he's a professor of law and business!).

From beginning to end, this work explains in detail the W's of business. This book is a must-read for new and private businesses who are considering going public.

Dear Mr. Black, as You did critize my review of your pamphlet, I hereby reply, that I stand by my former judgement. My former review does NOT accuse You of 'selling yourself' to SAP, nor does it question the features of SAP-products, or PWC. However, the scientific content of Your book was so low, that it had to be contradicted. These are my main points of criticism: (1) It does not catch the microeconomic logic behind EVA/CFROI: The concept of microeconomic producers rent. EVA is based on a static concept of economic rent, CFROI on a dynamic concept of economic rent.

(2) EVA implies linear simulation, CFROI non-linear simulation (e.g. experience curve effects).

(3) CFROI can be more easily aligned mit Real Options for strategic decisions.(e.g: the experience-curve-effect is a system dynamics modell for a dynamic Cournot/Nash-Oligopoly, which includes a Real Option for capacity extension during the growth phase of an homogenous product one produces with a substitutional technology with an S-shaped path for performance improvements ). If you try to align EVA with Real Options, you run the danger of creating unrealistic scenarios, which violate the laws of oligopolistic theory .

(4) EVA encourages managers to milk a business as it is based on linear depreciation concepts,nominal values,undervalues growth options, and implies linear simulation.

(5) In my 1998 edition there were indeed many mathematical errors (e.g. On the last past text page there was a formula with missing brackets). Your definitions of EVA and CFROI were grossly simplified, and can lead novices to misunderstandings.

(6) Your book fails to mention, that VBM requires consolidated financial statements for the last 5 years, and it does not explain, how to filter the relevant data. E.G: To use VBM in a senseful way, you must factor out transfer pricing, tax shelter effects, accounting distortions by cost budgeting techniques, the shelter effect of financial leverage e.g. Copelands 'Valuation' covers those topics without shocking novices with overly complex formulas - but your book totally ignores these topics.

(7) Some pictures in Your book have got a striking similarity with some charts in earlier editions of Copelands 'Valuation', but You did not have the courtesy to thank Copeland/McKinsey.

(8) You do not warn the reader about the dangers of VBM: Milking a business. If EVA/economic profit had an effect on industrial productivity, we would expect the UK to have the highest productivity in the world, because economic profit was invented by british companies such as BTR and Hanson in the late 1960's. The opposite is true !! In the 1970's the british industry collapsed - because economic profit + primitive linear simulation methods encouraged british managers to milk their companies, keeping prices high and deffering investments, until their assets/market share shrank below minimum-efficient scales.
A chart in Copeland 'Valuation' shows, that in the 1970/1980#s british productivity stagnated both in absolute and relative terms - while german and japanese companies manged to catch up.
Michael Gould "Corporate Level Strategy" ( a Boston Consulting Group publication which dates back to 1994) describes in much detail, how your 'financial controll style' encouraged BTR and Hanson to withdraw from high technology, to burn out assets and employes, to defer any investment in quality, research and education. Poorly applied Economic-Profit-Models were not the only reason for Great Britains industrial decline, but they did reinforce other problems: notoriously confrontational labour-relations and a poor level of professional education. If a CEO milks his company, cutting down investment in education/new machinery, his labour union will retaliate and do the same,asking for higher wages.

Summary: Your book has no scientific value and proposes a grossly simplified approach to VBM, that leads to desastrous, strategic mistakes. Poor Economic-Profit-Models achieved in no more than two decades, what 6 years of incessant bombing by the German Luftwaffe in world war two did NOT achieve: The total desindustrialisation of Great Britain. An industrial heritage created over a period of 100 years was sold off for a few years of high shareholder value.

Does that mean, that VBM is nefarious ? No, it does not.
VBM has got a future, if you ask real experts to simulate CFROI with system dynamics models and Real Options. CFROI, real options and system dynamics were first applied by the Boston Consulting Group back in the early 1970's - about 30 years ago. Therefore I stand by my judgement: Your book is dangerous and not scientific.

Most people hate lots of numbers and formulas. This book handles them well. This book clearly describes the concepts of Shareholder Value. I think this book, and many of its SV kind, are great for corporate financial people who have (mostly) accurate accounting numbers.

But for investors looking in from the outside, SV becomes difficult to implement. For example, what truly is EBITDA? Cash Flow? Which one? These illusive investor numbers make the SV process hard to implement for those of us without access to the real corporate books. Or at least, the process of determining the correct numbers is more difficult than the SV process lets on... in the world where accounting numbers and forecasts can be made to be anything the CEO or CFO want.

All in all, this methodology has brought a revolution to the corporate financial world. Divisions can now be compared with more rigor. This book easily and clearly explains the logic. The authors care about their subject and it shows.

John Dunbar

I despair of acedemics intent on picking holes in the acedemic rigour of books on shareholder value. Businesses are run by business managers. They leave "trendy" financial concepts for the FD to trot out to the board, in vain and ad infinitum. Bridge the gap between those who run the business and the cerebral numerates who keep score and you will...create shareholder value...hurray. This book does just that.