Intangible Assets Are Now Tangible

June 08, 2021 EDT

Benjamin Graham, Warren Buffett, Charlier Munger, and Seth Klarman are all extraordinary investors and they have one crucial commonality – value investing.

A value investor picks stocks that appear to be trading for less than their intrinsic value. Just as savvy shoppers will buy clothes on sale, savvy value investors treat stocks the same way. Of course, stock discounts are not as transparent as clothes discounts, as stocks do not post their sale percentages or original values.

Although value investing has been profitable for many decades, it appears the strategy has been faltering in recent years. The failure could be attributable to multiple factors; from the tech bubble of the 1990s to the recent pandemic in 2020.

But what if the reason is because the traditional metrics for value calculations are just too outdated? What if the lenses of the investing gurus we religiously followed are now too blurry? 

One of the major financial metrics value investors rely upon is the price-to-book ratio1, which compares a company’s market value to its asset valuations. The lower the ratio is, the better the potential price is for value investors. The more accurately this ratio is measured, the more likely value investing would succeed.

It could be said that the traditional asset valuation metric is potentially misleading. By immediately overlooking R&D and SG&A as expenses, the traditional metrics largely disregard the value of intangible assets2.

As of September 2020, the value of intangible assets of the top 10 companies in the world was $10.8 trillion as of 10/22/2020 according to Brand Finance, a leading brand valuation consultancy. Given the technological advancements within the business paradigm, companies’ proportion of intangible assets are increasing exponentially. In 1975, intangible assets represented only 14% of S&P 500 companies’ assets. As of 12/31/2018, the percentage was at least 84%, according to Aon and Ponemon Institute. Perhaps this is potentially the reason why value investors got away without regarding intangibles 40 years ago.

- Brand Finance. (2020, October). Global Intangible Finance Tracker (GIFT) – an annual review of the world’s intangible value.

- Ross, J. (2020, February 11). Intangible Assets: A Hidden but Crucial Driver of Company Value. Visual Capitalist.

1. Price-to-book ratio – P/B ratio compares a company’s market value to its book value. The market value of a company is its share price multiplied by the number of outstanding shares.

2. Intangible assets – an intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets.


It may sound like a big ask for the average investor to valuate companies’ intangibles. Hence, many retail investors have been relying upon ETFs to invest in value stocks. One popular option is iShares S&P 500 Value ETF (IVE), a passively managed ETF that tracks the S&P 500 value index. While the fund holds large assets under management and high liquidity, it is far from perfect, as returns are humble and the index the fund utilizes potentially outdated valuation methods as described above. 

Perhaps, the whole valuation process is out of a man’s reach. How can one possibly compute values that are almost impossible to quantify? This question is why some investors are newly turning to robots. Through machine learning, artificial intelligence can pick up important data in a plethora of fields and produce accurate projections for stocks’ growth potential. NVQ, of Qraft Technologies, is an ETF seeks to that invest in value stocks, depending on their intangibles. The AI model, by attempting to gauge intangible assets to correct the traditional value metrics, is up 22,67% since its inception on 12/02/20 on the New York Stock Exchange until 3/31/21.

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