Equity markets veteran Brian M. Nelson sets forth his analytical framework for evaluating stocks in Value Trap: Theory of Universal Valuation.
Value Trap describes the evolution and underpinnings of Nelson’s quest to identify appropriate empirical evidence for financial analysis of stocks. Interspersed with anecdotes from Nelson’s career, ranging from his beginnings as an analyst at Driehaus Capital Management to Director of Global Equity and Credit Research at Morningstar, he cautions against investors getting lured into “value traps,” scenarios where seemingly inexpensive stocks attract bargain hunters but continue to decline.
In Nelson’s opinion, shortcomings in prevalent financial analysis and investing include misguided focus on historical data, misinterpretation of common metrics, overreliance on indexing, and myopic pursuit of dividend-paying stocks. Instead, he believes enterprise valuation, an economic measure that considers cash-based sources of intrinsic value of a company, should be the paramount quantitative metric for assessing equities, regardless of investment perspectives such as growth, value, income, or momentum. In 2011, Nelson opened his own investment publishing research firm, Valuentum Securities, predicated on integrating enterprise valuation with relative valuation factors and technical indicators.
Well researched and organized, the book makes a compelling case for Nelson’s beliefs, which he places within the context of market history and classic finance literature. The material includes price charts, formulas, and extensive footnotes, as well as a bibliography and index.
This wealth of information and serious discussion of market theory will likely overwhelm all but the most seasoned investors. Although Nelson explains his ideas, he acknowledges that the book “is not a how-to manual on how to perform enterprise valuation, or a get-rich-quick investment program, but rather a text that I feel lays the foundation for a genuine conversation about stock investing, a conversation about price versus intrinsic value.”
Cynics may see Value Trap as a means to convert readers to Valuentum subscribers, but it stands on its considerable merits as a well written and cogent articulation of a distinct perspective on equity analysis.