I am fascinated by the subject of why the market value of companies exceeds their book value, often by a factor of 3 or more. I can understand why there are differences between industries (a manufacturing company requires more physical assets than a law firm) but what I find particularly fascinating is why these multiples differ so widely between firms within the same industry (and therefore subject to similar economics).
This suggests that something very interesting is going on at the individual firm level. The difference between how effectively or otherwise a firm uses its physical assets is a direct consequence of human ingenuity. This ingenuity is what lies behind the creation of all forms of intellectual property. And it is the quantity and quality of this intellectual property that largely explains the differences between the valuation of companies.
Given that intangible value (the excess of market value over book value) represents 2/3 of the market value of the S&P500, it is an important topic. My ambition is to provide some rules of thumb about the relative importance of different forms of intellectual property across different industries so that companies can start to manage these intangible assets more effectively.
BTW the title of this post is taken from a wonderful passage in “The Little Prince” by Antoine de St Exupery where the Little Prince realizes that, in order to understand what is really going on, he needs to “see with the heart because the most important things are invisible to the eye.”
