Now here is something that is dawned on me when skimming over "The Intelligent Investor" and some parts of "Security Analysis." One of the important ratios to look at is the Price To Tangible Book value (I would not consider intangible assets and hopefully the price to book value ratio doesn't take into consideration intangible assets of a company, but rather, tangible assets) as well as the Return on Assets and Return on Equity. If you have a good quality company, been in business for decades and been paying shareholders a dividend for the past 20 years without missing a year (20 consecutive years) and the company has way more assets then debt and has large number of assets, plus sports an excellent Return on Assets and Return on Equity with a low Price to Book ratio, then you are looking at a good quality company that is selling at a bargain that also provides a Margin of Safety for your investment.

So, if one was going to buy individual stocks, they really have to understand the importance of the Price to Book value, Return on Equity, Return on Assets as well as the company having way more assets than debt plus being a large size company that has been in business for decades AND has been paying dividends for the past 20 consecutive years, then that would probably be a good stock to buy. Tough criteria isn't it? Otherwise, if you can't find companies that meet that stringent criteria, you are better off putting your money into an index fund or fund of index funds. But as the stock market goes up and down, their are opportunities that arise that you could take advantage of as well, so it might be a good idea to keep some cash handy to buy individual stock that meets that stringent criteria. It's important the company has way more assets than debt plus have a large number of assets and capitalization so that it can weather and survive tough economic conditions when tough economic times come.

I found this website that explains the difference between return on assets vs return on equity for a company:

http://www.ehow.com/info_8237907_return-......ity.html

Assets of a company can be bought with debt so ideally you want a company that has way more equity than debt.

Why? That doesn't make any more sense to me than saying, "when valuing a company, I don't take into consideration any division or subsidiary obtained through acquisition -- I only focus on business units developed in house." It seems like you're artificially chopping off what might amount to a significant asset class, and not for any good reason that I can see.

Maybe this is just the patent lawyer in me, but you realize that (a) intangible assets -- particularly patents -- have value; (b) often intangible assets are significant parts of a company's value; and (c) if you think intangible assets are just flim-flam hoo ha, then you're living in the distant past? For a recent and stark example, look no further than Google's recent acquisition of Motorola Mobility. Google bought Motorola Mobility for ~$12.5B in 2011, kept the "vast majority" of the patents, then flipped everything else to Lenovo in 2014 for ~$3B. I don't know for a fact, but I'm guessing the tangible assets didn't suddenly lose $9.5B in value over 3 years.

More generally, the US has been steadily shifting from a manufacturing economy to an innovation / IP-based economy for the past 20 or so years, if not longer. In that time, patent filings are up, patent valuations are up, patents are a more and more significant part of mergers and acquisitions, etc. Over the last 10 or so years (or longer), banks have started to realize this. For example, a company called Ocean Tomo based in Chicago was one of the first companies to put together an index fund based on companies' patent valuations. (The valuations are made with proprietary techniques, of course.) The fund is called the Ocean Tomo Patent 300, consisting of the 300 companies with the best portfolios. Notably, since its inception, this index has outperformed both the S&P 500 and the Dow Jones, with the latter two being measured through their SPDR ETF. (Chart here.)

I get that intangible assets are difficult to price. But it's not impossible. Moreover, physical assets can be just as difficult to price. (What's the retail price of, say, a chip manufacturing plant? Is it just the price of the real estate plus the price of the individual pieces of equipment? Probably not.) When a large company says it has $X in physical assets, you shouldn't have any more confidence in that number than when a company says they have $Y worth of intangible assets.

The reason why I personally would not even take into account the value of the intangible assets of a company is because it's difficult to accurately ascertain the value of a company's intangible assets. So, I prefer to play it safe and only take into consideration the tangible assets of the company when determining price to book value. If the price to book value along with return on assets as well as return on equity and the company has way more equity than debt, plus been paying dividends for 20 consecutive years and is a huge capitalization plus a good price to book value on only it's tangible assets that is going at a bargain and all the data indicates it's a quality company going at a bargain, then and only then would I buy an individual stock. It's risky to try and take the intangible assets of a company into account when determining price to book value of a company in determining if you are getting a bargain on a quality company that can survive tough economic times while also still paying dividends to it's shareholders. This is also important in helping me to assure I have a good Margin of Safety for the principle of my investment as well when it comes to investing in an individual stock.

Hmmm. To clarify:

When a large company, (take Coca Cola, for example) says the value of their physical assets is such-and-such (say, $300M -- a number I made up, to be sure), certainly you don't double-check their work, right? I mean, that number is a line in a report, and anyone can believe it or not. If I understand what you're saying, you typically have a high confidence in the accuracy of that reported number.

And similarly, when Coca Cola values its intangible property (at $200M, say), you also don't double-check their work. And if I understand what you're saying, you typically have a low confidence in the accuracy of that reported number. Is that right so far?

If so, I'm not so sure you fully get that valuation can be a bit of a dark art, whether it comes to tangible or intangible assets. As a global principle, the value of something is just the price that someone is willing to pay. Sometimes that principle can be used to directly get a price, like when there's an actual market for the stuff you're trying to valuate. So if a company has a bunch of gold, then that's really easy to valuate (at least at a given time), because there's a market for gold.

It gets harder when you get into stuff for which there's little or no market. For example, Apple is building massive new headquarters. Although they're not finished, let's say the total cost of the building when they finish is $5B. Some of that is easy to valuate: the raw land, for example. Or the raw steel and glass that went into the building. But the final, completed building is going to be tough to put a value on. It's definitely not the $5B that went in to it. (If the value of something was just the cost of the raw materials and labor, then restaurants would never make a profit.) I don't claim to know all the details, but certainly there are accounting... "choices"... that can be made to aggressively or conservatively report the value of stuff, even if it's tangible stuff.

It can be true with patents, too. But sometimes patents are easy to valuate. For example, if a patent is part of a licensed portfolio, you can assign an exact revenue stream to the patent. That doesn't get you all the way to a valuation, but it helps. If a patent has been successfully litigated, you can also get a sense of its value by the amount in controversy in the litigation. For sure, there are other more squishy ways to value a patent, and individual firms often have their own proprietary ways.

My point is, there's often as much black magic in valuing tangible assets as there is with valuing intangible assets. Unless you're dealing with an unusual company (whose tangible or intangible assets are, for some reason, especially easy to valuate), then it doesn't make sense to me to be much more skeptical about reported values of one asset class over the other.

What's the value of the name "Coca Cola" compared to the tangible assets of the company?

Sometimes you end up being too clever byb half.