YouMaketheCall 137bundle of intangible assets that enable a business to generate su-
perior returns on equity, investment, an dassets. They can, as was
note dbefore, create a franchise or bran ding power that enables a
business to increase prices without hurting total sales volume. Dis-
ney, for example, can raise ticket prices to Disneylan dwithout hurt-
ing attendance.
Another sort of goodwill is called accounting goodwill. This is a
recor dof prices pai dfor businesses a company acquire dat a pre-
mium to book value. The economic value of accounting goodwill is
even trickier to appraise. If the purchase was a prudent one, the
value of the economic goodwill obtained is usually greater than the
amount of accounting goodwill. That is especially true because an-
other accounting rule requires that accounting goodwill be amor-
tized—reduced annually by specified amounts over future decades.
But again, if the businesses were smartly bought, the goodwill value
shoul drise over those years rather than, as the amortization sug-
gests, fall.
Sidestepping the need for these adjustments to the balance
sheet, an old-fashioned rule of thumb championed by Ben Graham
says that a common stock carries a sufficient margin of safety if it
can be bought at a price equivalent to less than the company’s net
current assets,^5 that is, a price equal to per share working capital.
This means that the buyer woul dpay nothing for the business’s fixe d
assets. Such companies are so rare today that this tool in its pristine
form is of little use.
But a modest variation retains the old rule’s conservative rigor
while still catching some fish. A business still qualifies if it can be
bought for its net current assets plus, say, half the original cost of its
fixe dassets. Thus, the investor pays for net working capital at the
state dvalue an dgets a 50% discount for all the other assets. In the
case of most companies today this would still be quite a low figure, but
some companies—particularly smaller ones—en dup in your nets.^6
The potential trouble with these approaches is that they relegate
you to being a bottom fisher—the person trolling for very low priced
businesses. That is fine, but you nee dto be careful not to buy a
dying fish. Bargain hunting leads to disaster if all you get is a burst
of economic return but nothing in the long term. Prudent investors
hunt for stocks with fair rather than cheap prices an dstrong rather
than modest economic characteristics. As Warren Buffett advises, it
is better to buy a great business at a fair price than a fair business
at a great price.