Intangible assets aren’t as valuable as bulls assume

Warren Buffett’s financial net worth is approximately $US160 billion. That ranks him among the world’s ten richest individuals; it also makes him by far the most successful investor of all time (see also How Warren Buffett has trounced “the world’s greatest hedge fund manager,” 11 August).

He’s repeatedly acknowledged that he’s always been an acolyte – albeit since the 1970s hardly a blind follower – of Benjamin Graham. In the Preface to the 4^th (1973) edition of The Intelligent Investor, Buffett wrote: “I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.” Indeed, he added, and has never recanted,

“If you follow the behavioural and business principles that Graham advocates ... you will not get a poor result from your investments.”

The most important lesson which Graham taught Buffett was the difference between the price and the value of a listed company’s shares. Only infrequently do they coincide; usually they vary – sometimes wildly. Graham, Buffett and value investors as a whole act accordingly: they buy (or refrain from selling) when their cautious estimate of value is significantly greater than price; and they sell (or refrain from buying) when price significantly exceeds value.

In The Theory of Investment Value (Harvard University Press, 1938), Buffett noted in his letter to shareholder in 1992, “John Burr Williams (demonstrated that the) value of any stock, bond or business today is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the asset.”

A company’s present value, Williams emphasised, is the discounted sum of the net cash it generates over its lifetime. The value of a company’s assets, tangible and intangible, recorded and unrecorded, thus derives from their ability to generate cash.

Investors can easily see, and usually straightforwardly evaluate, a company’s tangible assets – that is, its holdings of cash, receivables and inventories, real estate, factories and machinery, etc. In contrast, its intangible assets (“intangibles”) can be more difficult to identify and are usually much harder to value. In this article, I (1) review Graham’s and Buffett’s views about intangibles; (2) quantify the growth of intangibles on American balance sheets since 1945; and (3) demonstrate that today’s bulls aren’t merely overestimating the importance of intangibles: they’re grossly overvaluing them.

Over the decades, companies and markets have undoubtedly evolved. Equally, and as I demonstrate, they – including today’s “Magnificent 7” – haven’t transformed fundamentally. That’s why I’m very sceptical that the modestly rising percentage of intangible assets on corporate balance sheets justifies today’s high valuations.

Intangible versus Tangible Assets

Unlike tangible assets such as land, buildings and equipment, intangible assets have no physical form. Like tangibles, however, intangibles can – but, it’s vital to emphasise, don’t necessarily – generate income. To the extent that an intangible asset arises from contractual or other legal rights, it can be sold, transferred, licensed and thus valued. If accounting principles recognise intangibles (as we’ll see, they often don’t) they record them on balance sheets as non-current assets. Specifically, they typically record their price of purchase net of accumulated amortisation; in other words, they expense them over their estimated useful lives.

Intangibles include intellectual property (IP), and categories of IP comprise patents (exclusive rights granted for inventions), copyrights (exclusive rights over dramatic, literary, musical and certain other intellectual works), trademarks (signs or symbols which exclusively identify and distinguish a company’s goods or services) and trade secrets (which protect confidential algorithms, data, manufacturing and other processes, etc.).

Other types of intangibles include brands (reputation among and recognition by consumers), customer relationships (client loyalty, contracts and data) and goodwill (the excess of a business’s purchase price over the recorded value of its net assets, perhaps reflecting the value of IP, etc.).

Graham on Intangibles

Almost a century ago, Graham understood that intangible assets can be very valuable. In Chap. 42 of Security Analysis (1932), he wrote: “... under modern conditions so-called ‘intangibles,’ e.g. goodwill or even a highly efficient organisation, are every whit as real from a dollars-and-cents standpoint as are buildings and machinery. Earnings based on these intangibles may be even less vulnerable to competition than those which require ... investment in productive facilities ...”

Yet Graham was cautious about intangibles: he believed that they typically provide unreliable and speculative measures (compared to tangibles like property, plant and equipment) of companies’ value. Accordingly, when incorporating intangibles into valuations, investors must link their value to something tangible such as earnings:

“... intangibles may have a very large value indeed, but it is the income account and not the balance sheet that offers the clue to this value. In other words, it is the earnings power of these intangibles, rather than their balance sheet valuation, that really counts.”

Graham’s valuations of companies prioritised tangible assets and historical financial data; these emphases lessened the chance of overvaluation – and thus helped to prevent serious loss. Three grounds underlay his caution:

1. Unreliable valuation: intangibles are harder to value than tangible assets like inventory and receivables, and plant, equipment and real estate.
2. Speculative nature: given this difficulty, intangibles are inherently more speculative and their valuations prone to fluctuation.
3. Risk of overvaluation: over-reliance upon intangibles can – and often does – lead investors to overpay for companies whose “value” has been inflated by factors like overpriced acquisitions rather than underlying business fundamentals.

By focusing upon tangible assets, Graham sought to provide a justifiable, quantifiable, conservative and disciplined way to comprehend a company's financial underpinnings.

Buffett on Intangibles

It’s well-documented: until the 1960s, Buffett was a strict Grahamite; during that decade, Charlie Munger, who eventually became Berkshire Hathaway’s vice-Chairman, began to influence his thinking; as a result, since the early-1970s he’s regarded intangible assets as potentially crucial components of long-term value creation; in particular, they can create durable competitive advantages (“moats”).

Buffett’s investment philosophy has thus evolved from a Graham-like concentration upon tangible assets to one which includes intangibles among its pillars.

Since the 1970s, Buffett has sought businesses which possess strong competitive advantages and high returns on capital – which highly productive intangible assets often generated. (A large literature details this point; Kai Wu, “Buffett’s Intangible Moats,” Sparkline Capital, July 2025 provides a good, recent overview). Major examples include Berkshire Hathaway’s acquisition of See’s Candies in the 1970s, and its investments in The Coca-Cola Company during the 1990s and in Apple, Inc., since 2016.

Berkshire purchased scores of billions of dollars of Apple, Inc.’s shares NOT because it’s a “tech” stock, but because its intangibles have created powerful and highly profitable consumer loyalty and network effects.

Are Intangibles Really So Important?

It’s reasonable to assume – and it’s routinely asserted – that over the past several decades intangible assets have become increasingly significant. These assets can reflect technological and other innovation. On the other hand, their importance is easy to exaggerate: Alan Greenspan and his cheer squad did so during the Dot Com Bubble; today, many are apparently repeating this mistake (see, for example, Never mind DeepSeek: here’s why the AI mania won’t last, 3 February).

Graham and Buffett agree: although intangibles’ value is usually more difficult (and often very difficult) to estimate than the value of tangible assets, it often exists; hence intangibles can be vital ingredients of certain companies’ long-term success.

But their rising importance is a far cry from the exalted status to which today’s bulls have elevated them. Bluntly, they’ve greatly overegged the intangibles omelet.

“I’ve been arguing for years,” one bull asserted earlier this year, that “today’s U.S. market should not be compared (to its predecessors of) 20 or more years ago because it’s apples versus oranges, reflected in the much lower proportion of tangible assets in the collective S&P 500 balance sheet now compared to, say, 50 years ago.”

That claim isn’t completely false; it is, however (bearing in mind the distinction between internally developed and thus unrecorded versus acquired and thus recorded intangibles, which I’ll detail), potentially very misleading.

In Stop calling companies better: they’re merely dearer (22 September), I analysed one of the three categories (non-financial businesses; the two others are banks and households) of the U.S. Financial Accounts (FAs). Formerly known as the Flow of Funds, FAs are a key component of a comprehensive system of macroeconomic data including the National Income and Product accounts. Data for FAs derive from corporate reports to various agencies, tax filings to the Internal Revenue Service and surveys conducted by the Federal Reserve System. The Fed releases the FAs on a quarterly basis.

The Fed aggregates quarterly FAs into three sets of annual financial statements, i.e., for all banks, households and non-bank businesses, since 1945. To my knowledge, no other country compiles and publishes a comparable – never mind a longer or more detailed – and publicly-available series of valid and reliable data.

FA records major categories (including IP) of American nonfinancial corporations’ nonfinancial assets. Figure 1 plots IP as a percentage of their total assets. One the one hand, the percentage has generally risen; on the other hand, it’s increased from a miniscule base (IP comprised an average of just 2% of nonfinancial corporations’ assets in 1947) to a very low one (just below 7% in 2024).

Figure 1: Non-financial Corporations’ Intellectual Property as Percentage of Total Assets, 1947-2024

Using FA data, Figure 2 plots the five major components of American non-bank corporations’ nonfinancial assets as percentages of their total nonfinancial assets since 1945. In comparative terms, IP has always bulked puny: in recent years it’s overtaken inventories, but today it remains the second-smallest of these categories. Although its percentage has fallen over time, real estate remains by far the most significant nonfinancial asset (average of 48% of all such assets since 1945, and 44% in 2024), followed by equipment (21% and 19% respectively), receivables (13% and 15%), inventories (12% and 10%), and IP (6% and 12%).

Figure 2: Components of Non-financial Corporations’ Non-financial Assets, Percentages of Total, 1945-2024

Figure 3 simplifies Figure 2: it combines real estate and equipment into a single category, and inventories and receivables into another; it thereby reduces five categories of nonfinancial asset into three: (1) property, plant and equipment (“PPE”), (2) working assets (inventories and receivables) and (3) intangibles (IP).

Figure 3: Components of Non-financial Corporations’ Non-financial Assets, Percentages of Total, 1945-2024

PPE’s share has decreased glacially, from ca. 75% in 1945 to ca. 65% in 2024; working assets’ share has remained stable (minimum of 23%, maximum of 28%, average of 24%); and intangibles’ share has risen from a miniscule base (2% in 1945) to a very low one (12% in 2024).

Are intangibles really so important? Considering American non-financial corporations as a whole over the past 80 years, and bearing in mind the recording of intangibles under generally-accepted accounting principles (GAAP), the answer is unambiguous: “they’re not nearly as important as today’s bulls routinely assert.”

What about Internally Developed Intangibles?

Accounting standards in the U.S., Australia and elsewhere (AASB 138 in Australia and IAS 38 internationally) generally prohibit the recognition on balance sheets of internally developed intangibles. This prohibition stems from the inability reliably to (1) estimate these intangibles value and (2) foresee their associated future economic benefits. Hence Figure 1 excludes internally developed intangibles.

As an example, the values of Google’s search engine (and the algorithms and software which underpin it), its brand, the masses of the data which it collects, etc., aren’t recorded as assets on the balance sheet of its parent, Alphabet, Inc.

Ditto Apple’s brand, portfolio of patents and trademarks, software ecosystems, etc.; Amazon’s huge customer base and ability to collect and analyse customer data; and Facebook’s (Meta Platforms Inc.’s) ability to collect vast amounts of user data and use it to create targeted advertising campaigns, etc.

Hence Figure 1, Figure 2 and Figure 3 include only the value of acquired intangibles. When one company purchases another at a premium over the fair value of the acquired company’s net assets, the purchaser records this premium as “goodwill.”

That’s primarily how intangible assets appear on corporate balance sheets. Other acquired intangibles with identifiable values and lifespans, such as patents, trademarks, etc., will also be recorded on the acquirer’s balance sheet – and thus in Figure 1, Figure 2 and Figure 3.

There’s no single, total, widely-accepted and publicly-available estimate for acquired IP; still less are there valid and reliable series over long periods of time. Clearly, however, as pwc’s Global M&A industry trends: 2025 mid-year outlook makes clear, the figure is currently massive. In the January-June half of 2025, for example, global deal values increased to $1.5 trillion from $1.3 trillion in the previous period. Clearly, that figure includes plenty of “goodwill” and thus intangibles recorded on balance sheets.

What about internally generated intangibles? What about the “Magnificent 7”? Surely their internally generated intangibles comprise the lion’s share of their total assets and market capitalisations?

As an example, Table 1 summarises key figures (and ratios derived from these figures) from Alphabet, Inc.’s financial statements to 31 December 2024. In 2023, its return on equity (ROE) was 26% (that is, net profit after tax of $73.8 billion ÷ shareholders’ equity of $283.4 billion), and 30% in 2024. In 2023, property, plant and equipment (“PPE”) comprised $134.3 billion; that was 33% of its total assets ($402.4 billion), and goodwill (which includes acquired intangibles) constituted 7.3%.

Table 1: Extracts from Alphabet, Inc.’s Financial Statements, Billions of $US, 2023 and 2024

These ROEs are much higher than the average of non-financial American corporation’s; the ratios of PPE and intangibles to total assets, however, are comparable to the American average (for details, see Figure 5 and Figure 2 of Stop calling companies better: they’re merely dearer (22 September).

Alphabet’s internally developed intangibles are obviously valuable. The key question is: how valuable? My answer is that in 2024 it didn’t make sense to value them at more than ca. $250 billion. Given Alphabet’s market capitalisation ($2.4 trillion on 31 December 2024), my estimate of the value of its internally developed intangibles is barely 10% of its market cap.

Bulls will likely exclaim: “what’s WAY too low!” Table 2 shows why they’re likely mistaken.

Table 2: Extracts and Inferences from Alphabet, Inc.’s Financial Statements, Billions of $US, 2023 and 2024

The key point is that GAAP excludes internally developed intangibles. The consequence is that this exclusion inflates ROE – and its inclusion tamps it. My estimate of adjusted (for internally generated intangibles) ROE thus generates my estimate of internally developed intangibles’ value.

Given NPAT of $73.8 billion in 2023, and assuming that adjusted ROE is 15%, Alphabet’s adjusted equity becomes $73.8 ÷ 0.15 = $492.0 billion. That’s $492.0 - $283.4 billion = $208.6 billion more than its unadjusted equity; hence total adjusted assets is $208.6 billion more than unadjusted assets.

My estimate of the value of Alphabet’s internally generated intangibles in 2023 is thus $208.6 billion. Similarly, my estimate of their value in 2024 is $247.0 billion.

“It is the earnings power of ... intangibles,” counseled Graham, “rather than their balance sheet valuation, that really counts.” The bulls’ dispute thus isn’t with me: it’s with the fundamentals of arithmetic. The larger is your estimate of internally generated intangibles, the larger become adjusted (for internally developed intangibles) total assets and shareholders’ equity.

The higher is the bulls’ estimate of the value of Alphabet’s internally generated intangibles, the lower their estimate of its adjusted (for an estimate of its internally generated intangibles) ROE necessarily becomes – and, ironically, the more they undermine their core claim: i.e., that internally developed intangibles are enormously valuable because they generate very high NPAT and ROE!

What’s an appropriate estimate of Alphabet’s adjusted ROE? There’s plenty of room for discussion, debate and honest disagreement; equally, it seems to me that any estimate that’s less than 15% in 2023 and 17.5% in 2024 will be unreasonably low.

These baselines and this basic arithmetic provide my maximum estimates of Alphabet’s internally developed intangibles.

Two other consequences follow: firstly, in Table 2 its PPE comprised $134.3 billion ÷ $611.0 billion = 22% of adjusted total assets, and 25% in 2024; secondly, the sum of acquired and internally developed intangibles comprised ($29.2 billion + $208.6 billion) ÷ $611.0 billion = 39% of its adjusted total assets in 2023, and 40% in 2024.

Alphabet’s adjusted ROEs and ratios of intangibles to assets in Table 2 remain much higher than the American averages. But – and as the bulls rightly insist – companies like Alphabet are exceptional; few, in other words, will boast comparable ROEs and ratios of intangibles to total assets; accordingly, for the vast majority of American corporations the estimates in Stop calling companies better: they’re merely dearer (22 September) likely remain reasonable.

Using the same reasoning, I’ve estimated the values of internally generated intangibles for the other members of the “Magnificent 7.” Table 3 summarises key results.

They’ll surprise and disappoint bulls: in only one instance (Microsoft) do internally generated intangibles comprise a majority of total adjusted assets. The Mag 7 average is little more than one-third (36%).

Table 3: Estimates of Internally Generated Intangibles, Magnificent 7 Stocks, December 2024

In all cases, I’ve assumed that adjusted (for internally developed intangibles) ROE is ca. one-third less than the actual ROE; anything lower, it seems to me, is implausible – and anything higher unduly suppresses intangibles’ estimated values. Given my assumptions, the Mag 7’s internally generated intangibles bulk larger on balance sheets than does their PPE – but not greatly more.

On average, PPE comprises one-fifth of their adjusted total assets, and internally developed intangibles slightly more than one-third. Microsoft’s internally generated intangibles are the most valuable (my estimate is $361 billion), followed by Apple’s and Alphabet’s; Nvidia’s and Tesla’s are the least valuable. Finally, only Microsoft’s internally generated intangibles constituted more than 10% of its market cap on 31 December; Alphabet’s was 10% and the others less than 10%.

Ben Graham’s insight bears emphasis: when incorporating intangibles into valuations, investors must link intangibles’ value to earnings. Accordingly, given a particular NPAT, the higher is your estimate of the value of a company’s internally developed intangibles, the lower will be its adjusted ROE.

You can assign any value you please to Alphabet’s (and any and other company’s) internally generated intangibles – as long as you’re willing to accept the logical consequences.

Plus Ça Change ...

In the 1930s, Ben Graham acknowledged the potential importance of intangibles; in the 1950s, he elaborated: they can provide a very spongy – and thus a potentially unreliable – basis of valuation. In “The New Speculation in Common Stocks,” an address which he delivered in 1958 (reprinted as an Appendix in The Intelligent Investor), he asked: “does not Minnesota Mining and Manufacturing Company (known today as “The 3M Company” ) illustrate perfectly the new speculation as contrasted with the old?”

“Consider a few figures. When M. M. & M. common sold at ($101 per share) last year, the market was valuing it at 44 times 1956 earnings, which happened to show no increase to speak of in 1957. The enterprise itself was valued at $1.7 billion, of which $200 million was covered by net assets, and a cool $1.5 billion represented the market’s appraisal of ‘good will.’ We do not know the process of calculation by which that valuation of good will was arrived at; we do know that a few months later the market revised this appraisal downward by some $450 million, or about 30%.”

“Obviously,” Graham continued, “it is impossible to calculate (precisely) the intangible component of a splendid company such as this. It follows as a kind of mathematical law that the more important the good will or future earning-power factor the more uncertain becomes the value of the enterprise, and therefore the more inherently speculative the common stock.”

Accordingly, “it may be well to recognize a vital difference that has developed in the valuation of these intangible factors, when we compare earlier times with today. A generation or more ago it was the standard rule, recognized both in average stock prices and in formal or legal valuations, that intangibles were to be appraised on a more conservative basis than tangibles.”

“But what has happened since the 1920s? Essentially the exact reverse of these relationships may now be seen ... There is a logical reason for this reversal in valuation procedure, which is related to the newer emphasis on growth expectations ...Thus what is really paid for nowadays in the case of highly profitable companies is not the good will in the old and restricted sense of an established name and a profitable business, but rather their assumed superior expectations of increased profits in the future.”

“In an important and very real sense,” Graham concluded, “tangible assets have become a drag on average market value rather than a source ... Given the three ingredients of (a) optimistic assumptions as to the rate of earnings growth, (b) a sufficiently long projection of this growth into the future, and (c) the miraculous workings of compound interest ... ”

What are the consequences? In Graham’s words, “the security analyst is supplied with a new kind of philosopher’s stone which can produce or justify any desired valuation for a really ‘good stock.’”

Today’s AI Mania Reminds Us That Intangibles Necessitate PPE

According to The Wall Street Journal (“When Will the Surge in AI Spending Pay Off?” 25 September), “the artificial-intelligence boom has ushered in one of the costliest building sprees in world history. Over the past three years, leading tech firms have committed more toward AI data centers, ... plus chips and energy, than it cost to build the interstate highway system over four decades, when adjusted for inflation. AI proponents liken the effort to the Industrial Revolution.”

Yet no one knows whether this enormous gush of “investment” (“speculation” is perhaps a better word) will generate a return – and if it does, when it will. Nor do I or anybody else know if a bubble is forming.

What we DO know is that a boom of intangibles (namely AI algorithms and software) has triggered a boom of tangible assets. It thereby underscores what bulls usually ignore: intangible assets presuppose and necessitate colossal quantities of tangible assets like PPE.

Without tangibles, the intangibles are useless and thus worthless (and without the intangibles, the tangibles are pointless). On that basis, it’s reasonable to anticipate that in the years to come the percentage of tangible assets – namely the PPE which the “AI Revolution” has necessitated – on Mag 7 balance sheets will rise substantially.

“The building rush,” WSJ continues, “is effectively a mega-speculative bet that (AI) technology will rapidly improve, transform the economy and start producing steady profits. ‘I hope we don’t take 50 years,’ Microsoft CEO Satya Nadella said at a May conference with Meta CEO Mark Zuckerberg, referring to the initially slow adoption of electricity. ‘Yeah, well, we’re all investing as if it’s not going to take 50 years,’ replied Zuckerberg, who surmised at a recent White House dinner the company’s U.S. spending through 2028 was ‘probably going to be something like’ $600 billion.”

WSJ notes that “Silicon Valley watchers worry that enthusiasm for AI has turned into a bubble that has increasingly loud echoes of the mania around the internet’s infrastructure build-out in the late 1990s” (see also “What the Dot-Com Bust Can Tell Us About Today’s AI Boom,” The Wall Street Journal, 10 March).

“Then, telecom companies spent over $100 billion blanketing the country with fiber optic cables on the belief that the internet’s growth would be so explosive, most any investment was justified. The result was a massive overbuilding that made telecom the hardest hit sector in the dot-com bust ... Today, the typically dull world of chips and data centers has become a raging multi-hundred billion dollar battleground where Silicon Valley giants one up each other with spending commitments ...”

OpenAI’s Sam Altman calls his data-centre effort “Stargate.” In mid-September, company executives “laid out plans that would require at least $1 trillion in data-centre investment, and Altman recently committed the company to pay Oracle an average of around $60 billion a year for servers in data centres in coming years. Yet OpenAI is on track to take in just $13 billion in revenue from all its paying customers this year.”

“ ... Consultants at Bain & Co. (have) estimated the wave of AI infrastructure spending will require $2 trillion in annual AI revenue by 2030. By comparison, that is more than the combined 2024 revenue of Amazon, Apple, Alphabet, Microsoft, Meta and Nvidia, and more than five times the size of the entire global subscription software market” (see also “Debt Is Fueling the Next Wave of the AI Boom,” The Wall Street Journal, 29 September ).

History is replete with technology booms which bust. As a rule, the more intense the mania becomes, the greater is the likelihood that it ends badly.

Enthusiasm over an invention or clusters of technological advances – the list since the early-19^th century includes canals, railways, telegraphs and telephones, electricity, aeroplanes, semiconductors and the internet – triggers a stampede of “investors” (most of whom are actually speculators). Underpinning it is the overconfident expectation of immediate explosive growth of revenues and eventual huge profits.

Increasing and eventually massive overbuilding ensues until speculators realise that their expectations are gross exaggerations. They then suffer enormous losses – even when the new technology pervades and transforms the economy (as electricity, railways, air transport and the internet have done).

Britain’s 19^th-century railway mania “was so large that over 7% of the country’s GDP went toward blanketing the country with rails. Between 1840 and 1852, the railway system nearly quintupled to 7,300 miles of track, but it only produced one-fourth of the revenue builders expected, according to Andrew Odlyzko, an emeritus University of Minnesota mathematics professor who studies (financial) bubbles.”

He calls these episodes of unrestrained optimism “collective hallucinations.” During these manias, speculators, society and the press adopt a herd mentality and ignore and deny obvious risks.

WSJ’s report on 25 September concludes: “there are growing, worrying signs that the optimism about AI won’t pan out. An MIT report found 95% of organizations surveyed are getting no return on their AI product investments. A University of Chicago economics paper found AI chatbots had “no significant impact on workers’ earnings, recorded hours, or wages.”

“OpenAI’s release of ChatGPT-5 in August was widely viewed as an incremental improvement, not the game-changing moment many expected. Given the high cost of developing it, the release fanned concerns that generative AI models are improving at a slower pace than expected. Each new AI model – ChatGPT-4, ChatGPT-5 – costs significantly more than the last to train and release to the world, often three to five times the cost of the previous, say AI executives. That means the payback has to be even higher to justify the spending.”

“This (AI mania) is bigger than all the other tech bubbles put together,” reckons Roger McNamee, co-founder of tech investor Silver Lake Partners. “This (AI) industry can be as successful as the most successful tech products ever introduced and still not justify the current levels of investment.”

If so, and if the AI mania replicates its forebears from railways to the internet, then write-downs of hundreds of billions of dollars – or more – of PPE and internally generated intangibles may eventuate.

Conclusion and Implications

From my analysis I draw five conclusions. Do intangible assets exist? Conclusion #1: they unquestionably do. Can they generate considerable (as a percentage of net assets) income? Conclusion #2 is much more qualified: they can, but don’t necessarily.

How important are intangibles, including the internally developed intangibles which GAAP doesn’t record on corporate balance sheets? Conclusion #3a: my analysis of American non-financial corporations as a whole implies that they’re not nearly as significant – and PPE remains much more central – than bulls routinely assume.

Conclusion #3b: my analysis of the financial statements of the “Magnificent 7” affirms that intangibles are very important – but as a rule, aren’t nearly as crucial as bulls routinely assert. Moreover, tangible assets, particularly PPE, are much more important than tech bulls acknowledge.

How valuable are intangibles, including internally generated intangibles? Conclusion #4: my analysis of the Mag 7 corroborates their value – but adds that, as a rule, they aren’t as nearly valuable as bulls often assume.

I also reconfirm Graham’s key insight: when incorporating intangibles into valuations, investors must link intangibles’ value to something tangible such as earnings.

How important and valuable will intangibles be in the decades to come? Conclusion #5: no precise answer is possible; nonetheless, it’s reasonable to assume that their importance (as a percentage of total assets) will continue to increase from a low base.

Equally clearly, if the bulls are correct then the AI Revolution will certainly entail the expenditure of hundreds of billions – and perhaps trillions – of dollars of PPE. Intangibles, in other words, presuppose and necessitate MUCH more tangible capital than bulls typically admit.

Until the Industrial Revolution, agriculture utterly dominated the economy; hence arable land was virtually the only basis of wealth. In a mercantile (trading) economy, which supplemented but didn’t replace the agricultural economy, inventories and receivables became a basis of wealth. In the wake of the Industrial Revolution, which greatly expanded the economy but didn’t replace agriculture and trade, manufacturing dominated – and factories and machinery became the major basis of wealth.

Since the mid-20^th century in wealthy Western nations including Australia, services have increasingly overtaken manufacturing, and since the 1990s information technology has infused agriculture, trading, manufacturing and services. Yet, judging from American corporations’ balance sheets, intellectual property and other intangibles hardly dominate today’s “knowledge-based” economy.

Over the decades, companies and markets have undoubtedly evolved. But they’ve NOT transformed fundamentally. I’m therefore very sceptical that the steadily but modestly rising percentage of intangible assets on corporate balance sheets justifies today’s high valuations.

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