A $28 billion strategist flags the multi-trillion-dollar roadblock

He cited video gaming as one such sector. If spending on ads for new games were to be capitalized on gaming companies balance sheets, their price-to-book-value ratios would fall from 4x to 3x, Neuman said. In other words, a single accounting tweak that's more in tune with the times suddenly makes them appear cheaper. That example constitutes the first of two approaches Neuman recommended to update the definition of "value" as it exists in various indexes and ETFs. It's labor intensive, and involves understanding the value of assets, as well as products in the research and development pipeline, that are not expressed on a company's financial statements. An example is the value of Google's search algorithm, Neuman said. Neuman's second piece of advice to circumvent the existing definition of value is to substitute the price-to-book ratio for R&D spending as a share of sales. The idea is that the more a company is spending on innovating, the greater chances that it will have what it needs to grow its earnings in the future. Ultimately, innovation is what guides Neuman's approach to investing because it is what secures future profits. And it's where the real value is created today. As of December 31, the most innovative companies had outperformed the S&P 1500 by over 3 percentage points annually over the prior 20 years, and about 4 percentage points for the past 10, he said. "Most ink is spilled on where we are in the economy," Neuman said. "But it's not as important as innovation, which is always growing."

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