Yesterday I showed how to derive the book value of a company using Redfin as an example.

We found that Redfin's book value per share is $3.57. But currently, Redfin stock trades at $42.24.

So what is going on here? Is Book Value predicting that Redfin's stock price will drop massively?

Not really. Here's why: book value is the worth of all tangible assets but not intangible ones.

Book value worked better in an industrial-based economy, when companies owned valuable tangible assets, like manufacturing plants and equipment. Today’s service economy is filled with companies whose biggest assets are their brands, intellectual property, or customer loyalty, which don’t show up on the balance sheet.

Essentially, the market is saying that Redfin is worth much more than its balance sheet assets because its intangible assets are so valuable.

But how do you value intangible assets without a standardized approach?

This ties into what I was thinking about four days ago regarding market efficiency. The argument is that the market is usually efficient, which makes finding good deals difficult. But what if accounting principles like book value are no longer suited to accurately describe the value of today's companies? What happens when the standard way of deriving value is obsolete?

Well, investors are going to start finding new ways to more accurately (in their opinion) find the true value of a company. But without standardization, there is more room for disagreement and inefficient price discovery.

This turned into an argument for continuing to learn about investing and research stocks, because there are plenty of reasons out there why a stock might be mis-priced; ...outdated accounting practices being one of them.