Risk and the valuation of intangibles

Here is an interesting quote from a financial analyst on intangibles. The person in quoted is John Higgins of the London firm Capital Economics. The story in the Financial Post (“The value of intangibles in an overvalued market”) is all about how the US market is not necessarily overvalued once intangible are taken into account. But it is this quote that I found especially telling:

“Admittedly, expenditure on intangible assets is riskier than expenditure on tangible assets, and may turn out to be worthless. But shareholders are still likely to assign some value to expenditure on intangible assets,” he said.

Therein lies one of the most salient factor in assessing intangibles: what is the risk. Will this investment pay off — or will it be worthless? In the industrial age, the investment in plant and equipment was also seen as risky. But the question was basically a market risk: will there be enough demand for this level of production? With intangibles, the risks are multifold. And the task that much more difficult.

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