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Apr 04, 2018, 19:43
Book Review: Accounting for Value by Stephen Penman

The book is an effort to compile finance and accounting under a sole rubric. Stephen Penman has clings to the basic finance theory principles but provides a refined and ameliorated version of the principles from a fundamental perspective.




Penman is a professor at the Graduate School of Business, Columbia University. He was awarded with Notable Contribution to Accounting Literature in 1991. His previous book the Financial Statement Analysis and Security Valuation is now being published in its 5th edition for which he was awarded the Deloitte and Touche Wildman Medal in 2002. Stephen Penman has his expertise in Investment Strategy and Value Investing and the book is a demonstration of his approach towards it.


The writing will be like reading a plumbing manual to multiple readers but will be a valuation bible for investors. It will be difficult for beginners and amateurs to understand the content in one read. As the book progresses the concepts are explained exhaustively. The book focuses on the chief aspects in our fundamental financial principles which have faded in the background over the years. Maintaining equilibrium of finance and accounting the content is explicit. It offers fresh view on the accounting principles. The author expresses his doubts on the level of reliability that we have on accounting. According to him the opinions and advice provided to the shareholders/investors should be formed on the basis of facts and figures of the business and not on mere speculation.


“Value is about business, not about paper.”- Stephen Penman.


It covers an array of the elementary financial and valuation concepts that are practiced on a day-to-day basis. Stephen recommends its readers to return to the basics making it the cynosure of his book. The first chapter mentions the diversion that exists today, where the focal point is not the business but the tools and devices that focus on paper. The theories which were previously dependent on the published financials are scraped by Stephen. He says that the finance theory models which do not provide useful tools should be abandoned and substituted with models which are rooted in accounting.


10 principles are mentioned in the initial chapter which is based on fundamentalist valuation. It underlines the distinction between the valuations based on rudimentary principles and the valuations formulated on the basis of finance methods and actual accounting rules. Stephen plays on the front foot with the underlying support of his business knowledge.


Stephens approach towards the financial fundamental is ambiguous. He is inclined to accept some of the financial principles with an open mind whereas some are ruthlessly scratched. The reason behind this is explained in the latter chapters of the book.


After exposing the reader to the entire criticism author concentrates on what should a fundamentalist base his valuations. ‘The Accounting Approach’ is not an out of the way answer but the according to Penman the accounting approach is not the traditional accounting methods adopted. He presses on the fact that as a fundamentalist an individual should possess the caliber of distinguishing the right and wrong accounting.




The financial economics theory established by Modigliani and Millers papers from 1958-63, the no-arbitrage principle and the Efficient Market Hypothesis are used as criterion to individualize fundamentalist analysis and fundamentalist approach. According to the Penman you don’t buy a stock, you buy business. The focus here is that finance approach is formed on the basis of the valuation of the stock whereas the fundamentalist approach is formed on the valuation of the business.


But he is not completely negative towards the fundamentalist approach though some of the finance ideas should be thrown away but others are acceptable. This is where the author seems rhetorical in his writing. He introduces some of the basic principles of financial economics only to scratch them and then re-formulates them in an advanced manner and manifests them to be acceptable.


The book lays strong emphasis on how the valuation is calculated. If as a reader you want to understand how the valuation of a company is calculated I wouldn’t strongly recommend the book. The book primarily focuses on distinguishing the concepts of Fundamentalist approach and Fundamentalist accounting. The second broadly covered topic is the concept of mis-pricing. For instance for calculating the actual growth of a company first calculate the value of the company assuming that no growth is recorded. This information can then be compared with the current growth level of the company.


In certain sections the author is seen justifying accounting based valuation. With reference to his example in chapter 8 he suggests that the market price should be challenged. This becomes the reference point for validating the valuation achieved through accounting procedures. This is a loophole since there is no alternate mechanism provided in the book for calculation.


Besides the mentioned criticisms the book is enriched with mainstream finance and accounting procedures explained in detail. The language is filled with financial jargons but nothing that a thesaurus won’t give a solution to. However a reader familiar with the financial concepts mentioned will eventually be frustrated with the conclusions achieved in the end.


The Disciplined Trader by Mark Douglas


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