Value vs. Growth investing trades on P/E and P/B. These ratios are often interpreted as pricing multiples indicating over or under pricing. And that they could be, for price is in the numerator. But earnings or book value are in the denominator, so they are also determined by how earnings and book value are measured; they are accounting phenomena. Thus, understanding the accounting for earnings and book value is the key to their pricing and to understanding the fundamentals behind Value vs. Growth investing. The common interpretation is that book value is the assets employed to get earnings2Msometimes called asset in place2Mand earnings are the return to those assets. But the student of this book understands that is not so. Investments in some assets like brands and R&D are not booked to the balance sheet. And earnings are reduced by those investments. Accounting principles like the realization principle and conservative accounting for investment come into play.
As both earnings and book value are determined by the accounting, so it book rate of return, ROE. That is the key to understanding the trap in value vs. growth investing, as chapter 12 explains.