Benjamin Graham was one of Warren Buffett’s teachers and Buffett considered Graham’s books Security Analysis (1934) and The Intelligent Investor (1949) to be his investment Bibles. 

Back in Graham’s day, financial statements were pure chaos— accounting standards were fairly new and changed often.  Even Graham criticized financial statements, so instead, he developed ways to look for companies whose intrinsic value – cash, underlying asset values, proprietary processes and valuable names such as Coca Cola – could be valued and weighed against other companies. This is called Value Investing.

For decades, Graham’s value investing approach was the holy grail—find “undervalued” stocks using trusty old ratios, hold your nose during market mood swings, and rake in long-term gains.  This style made Warren Buffett a folk hero.

But times have changed, and the world has gone digital—faster than you can say “TikTok.” Now, Graham’s methods are starting to look a little…let’s say, vintage. In fact, I’d bet if Ben Graham were around today, his thinking would be changing, at least when it comes to evaluating technology stocks.  Today’s accounting rules weren’t exactly built for cloud computing, subscription apps, or companies that barely have an office let alone a factory, so ways to slice and dice the numbers must change with the times.

Same Old Accounting Tricks—Now with Extra Spin

Let’s be real: Management can do their financial sleight-of-hand every quarter to make their numbers look better. Channel stuffing (look it up), creative revenue recognition, and hiding bad news until it’s old enough to grow whiskers—happens all the time. Some famous folks got caught (looking at you, Enron, Wells Fargo, Toshiba…). Others, maybe just not yet.  

Digital Businesses: No Assembly Line Needed

Here’s where things get really fun: Classic, physical companies—think Ford—dump cash into factories, machines, and workers for three years and hope their shiny new cars will fly off lots at some point. A digital business—think Tesla launching a new software feature—needs a programmer and a dream. They roll out an update, click a button, and BOOM: millions of customers get to pay few extra bucks for a new service, creating a new or increased revenue steam, no assembly line required.

That means you can’t just look at the “books” to truly know what a digital business is worth or how likely it is to grow over time. The numbers understate what’s really happening, and the more digital the company, the bigger the gap. Old time valuation standards like PE ratios and “price to book” just can’t keep up.

While old-school firms count physical things as valuable, long-lasting assets, digital firms expense items like software development right away. They invest to develop intangibles and that makes their numbers look weak when old school accounting standards are applied. From a Graham-style perspective, they seem very expensive. Spoiler Alert: That’s often the opposite of reality!  Tech stocks haven’t been about valuations for years.

All those companies that seemed “crazy expensive” – Amazon, Nvidia, Palantir— got knocked for sky-high PE ratios back in the day.  But then their stock prices exploded as their innovative platforms became used by more and more customers. Meanwhile, investors wanting more value decided to play it safe and watch from the sidelines, waiting for prices to pull back and offer more value – as fortunes were made by growth investors.

The Secret Sauce: Digital “Return to Scale”

Here’s a fun term: “Return to scale.” It just means digital investments get more and more valuable as you add people or users, often for very little extra cost. So, once a digital company gets going, a huge portion of new revenues flow right to the bottom line. Old accounting rules don’t count Facebook friend invites or Apple’s app downloads as “assets,” but maybe they should.  Current accounting standards do not account for the increased value of digital assets that come from increased usage, eyeballs or clicks. 

So, Now What?

Graham/Buffett style valuation analysis worked for a long time but now presents a misleading picture for a large swath of the investing universe.  Don’t blindly trust those old ratios. These days, high PE can be a good thing if you understand why it’s high—like digital spend.

Don’t get me wrong.  To make investment decisions I still run multiple scans screening the 10,000 available stocks for various factors I consider informative.  But P/E ratios are no longer the main one.

How do I spot a winner? I look for businesses investing in digital tools producing recurring revenue. I ignore the cranky classic ratios—focusing instead on management’s vision, user growth, and customer loyalty. I love finding companies offering paradigm shifting products that are growing fast. Then I dig into their story before worrying about the financial statements.

In short: Being a value investor today means thinking like Warren Buffett.  But growth investors binge-watch Netflix, listen to Spotify, subscribe to cloud services, and know that sometimes the best 21st century value is hiding in a viral app or a pile of code.