Customer Reviews

The Quest for Value: A Guide for Senior Managers

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I was introduced to The Quest for Value during my MBA program. The material covered in the book was the basis for my Finance course, and I purchased the book to examine the source material. Finance is a branch of Economics, not Accounting, and many of the assertions made by Stewart reflect that fact. Familiarity with the basics of Microeconomics will greatly facilitate an understanding of the concepts described in the book. The fact that Stewart's work builds on sound economic concepts should be considered a strength, and not a weakness. The fact that other investment valuation tools do not conform to standard economic theory (Asset-Based, Excess Earnings, etc.) is the primary weakness of those theories. Investors are generally concerned only with prospective cash flows and the risks associated with those cash flows. The EVA Model captures the essential factors determining return and risk, removing Accounting distortions, and allows managers, owners, and other stakeholders to make informed decisions. Portions of the EVA Model have been integrated into other valuation tools, but usually in a piecemeal fashion. The genius of the EVA Model is the consolidation of many useful theories into a single model. A word of caution. If you are planning to use the EVA Model to "beat the market", please read the book. Stewart, Merton Miller, Damodaran and others are strong believers in the efficient-market theory, which essentially refutes the notion that tools like the EVA Model can be used for such purposes. As far as the general acceptance of Stewart's theories, it has been my experience that most corporate Finance departments are run by Tax Accountants with a limited/non-existent knowledge of the economic principles espoused by Stewart. They remain (much like my Investment Management Professor [1998], who had little knowledge of Stewart) enamored of EPS and ROE, long after numerous studies have indicated a loose correlation between EPS/ROE and stock value. While the book won't help you "beat the market", it is an outstanding tool for performing valuations on Closely Held Companies. The Quest for Value, in combination with the works of Damodaran (Investment) and Shannon Pratt (The Valuation of Closely Held Companies, The Valuation of Small Businesses and Professional Practices), will greatly assist any efforts in the valuation of such businesses.

This book brings emphasis to the importance of Return on Invested Capital as a valuation metric in security analysis, although the author purports to substantially refine and expand on your prosaic understanding of this concept. It is an ambitious work that has a couple of inexplicable shortcomings, given its length, price, and its author's flair for pointing out the flaws in other valuation methods. The author makes no effort to apply his valuation methods to financial service companies (EVA is applicable to these kinds of companies, but you have to attend an EVA seminar to learn how to do that). There is no index! And there is little empirical data by researchers --outside the cult of EVA, at least-- to support some of Stewart's rather bold claims about this being a better metric for predicting stock price advancements than earnings, free cash flow, return on equity, etc.

And then there is the matter of EVA (tm) itself. Given the scarcity of objective data to support EVA as THE metric which best calibrates and predicts advancing/declining security market valuations, who really needs to embrace a somewhat complicated proprietary formula and worry about trademark infringement? For decades, Warren Buffett got by with crude, freebie valuation concepts such as return on equity, return on assets, the non-trademarked version of return on invested capital, and free cash flow. These ratios are as wonderfully easy to calculate in aggregate as EVA is hard to calculate, and the EVA enthusiast's faith that the latter proprietary concept is somehow better than the former freebie ones seems silly --although it does make for a lot of extra work (securing the future for the trademark owners, who have made a lucrative career of this stuff).

Stewart has crafted an engaging treatment of Economic Value Added (EVA) which is accessible to both financial professionals and "lay-investors" alike. The material is highly readable and the case examples serve well to illustrate important concepts. However, one caveat to all of those "fools" who think they have found the holy grail to selecting winning stocks: EVA has been around for a long time (the theoretical work precedes THE QUEST FOR VALUE by decades) and is well-integrated into investment management methodologies. There have been several studies which demonstrate that selecting stocks based on EVA or even changes in EVA will not produce excessive returns for investors (See Damodaran). Thus, the real "value" of THE QUEST FOR VALUE for private investors is to highlight the limitations of accounting measures of valuation.

Many of the concepts in this book have been described and used by successful investors such as Graham in the 30s, Buffett's adaptation of Graham's ideas in the 70s and 80s, and the more recent breed of Intrinsic Value-driven investors who garner wide respect today. New terms are introduced with great fanfare when they often are simple rearrangements of well-known formulas (taking the inverse of a ratio somehow gives you a radically new insight?). It seemed to me that the major contribution of the author is a new set of acronyms.

Claims about how failing companies turned around into successes because they adopted EVA are not sufficiently supported. Those turnarounds could have happened for any of many other reasons. The claims would be believable if they were well supported with facts and deeper analysis. As they are, they detract from the overall quality of the book and raise questions about other claims made in it. At times the author's tone is condescending, as if we can all assume his statements don't need proof!!

The book could function as a fair reference but as most other reviewers have noted, there is no index, and the table of contents is about half a page! This is particularly difficult because the discussions of important concepts are somewhat spread about in the book.

On the positive side, the author's focus on return on capital is good and the reasoning well stated and easy to understand. By the same token, his discussions of what provides true value to the investor (and business manager) is good. But these are not very original. Either the book should have been about one-fourth as long, or the examples the author used to justify EVA should have been much more thoroughly developed.

The Quest for Value is the best modern financial text available today and certainly the best written since Benjamin Graham's Security Analysis. I teach the Quest for Value to graduate students at the University of St. Thomas in Minneapolis and manage FalkerInvestments, an investment firm specializing in EVA investments. The Quest for Value is our financial bible.

A few tips in reading this excellent book. Read the Preface by Joel Stern and Chapter 1, the introduction; then skip to Chapter 12 which deals with the best discussion of the concepts of cost of capital available today. Then read chapters 2 and 3 and select the following chapters based on what interests you.

This book appeals to business readers at all levels, so those with less experience should not get bogged down in some of the more sophisticated areas of the book. In other words, it can be read selectively for content.

The Quest for Value is a classic work describing the many facets of what creates shareholder value.

The first two chapters describing market myths and market realities lay down a basic framework for the rest of the book on the creation of shareholder value.

The best topics in the book cover dividend policy, mergers and acquisitions, capital structure, and compensation incentives.

In addition, the book spends considerable time explaining the concept of Economic Value Added (EVA). I find these sections of the book less valuable as the examples of how to calculate EVA are extremely simplified. In practice, it is much more difficult to calculate EVA and I find the traditional DCF approach much easier to deal with.

Overall, the well written and communicated sections on the creation of shareholder value more than compensates for the weak treatment of calculating EVA. As such, I would recommend this book to any serious student or practitioner of finance.

I found this book to be a great reference book for the EVA system. I would caution readers that this book is probably better as a reference for those who have taken the Stern Stewart seminars on EVA than as a stand-alone volume.

Nevertheless, Stewart does a good job, in my opinion, of laying out the EVA framework and provides some good real-world examples of how EVA is used by companies to manage their financial affairs.

This book is a best guidance for understanding, caculating and making practical use of the EVA concept.
It has been recognized as a great work which emphasize the importance of the shareholder value and open a new era in business decision making process.
The author has not only concrete theoretical backgrounds but also many experiences in corporate practice.
As a corporate financial staff, I got an amazing impact from this excellent book.

A comprehensive overview of the emerging school of thought on valuation theory and financial analysis. A very useful and enlightening book to read for corporate finance practitioners and for undergrads aspiring for careers in strategic consulting and/or investment banking. Anecdotal passages clearly illustrate the arguments presented in the book. Although quite opinionated, Mssr. Stern and Stewart convey a compelling argument that dispells traditional and current analyticals. Although the subject matter is corporate finance, Mssr. Stern and Steward display noteworthy talent in writing/narration style, surprisingly transforming a mundane subject into an enjoyable and even humorous book.

When selling, it is easy to fall into the trap of talking price or comparing yourself to your competitors. The Quest for Value illustrates how you can quantify delivering value to your clients. Listen to their needs and use your product or service to deliver a solution for those needs. You can use EVA as a method to define the solution for your customers by quantifying the benefit. You will earn your client's respect without having to lower price or fall into roadblocks set by your competitors.