If you were given a crystal ball that would accurately predict a company’s growth over the next year, you would logically invest in those companies…
James P. O’Shaughnessy’s What Works on Wall Street has long been one of my favorite books on investing. Not because it’s so readable—it includes pages and pages of backtests that are a real slog to get through. And not because it’s impeccable—there are some odd omissions, which I’ll get to later. And not because it strikes an estimable balance—there’s simply not enough about accounting measures, and what’s there is somewhat weak. . . .
In 2000, Joseph D. Piotroski was a young associate professor of accounting at the University of Chicago Graduate School of Business, having obtained his Ph.D. from the University of Michigan the previous summer. That year he published a paper called “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers” in the Journal of Accounting Research. Seldom has an accounting paper made such a huge splash.
The calculation of intrinsic value has become a forbidding and abstruse practice. It seems reserved for nerds and members of the Warren Buffett cult. As Aswath Damodaran, one of its most elegant and charismatic practitioners, and perhaps the person who has promoted it more than anyone of late, wrote recently, “uncertainty underlies almost every part of intrinsic value.” . . .