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Preface vii

analyst’s earnings forecast converted into a valuation? How can an investor rely on earnings
when earnings are sometimes measured with doubtful accounting methods? What role does
the balance sheet play? What is a growth company and how is growth valued? What does a
firm’s price-earnings (P/E) ratio tell you? What does its price-to-book ratio tell you? How
does one determine what the P/E or price-to-book should be?
Most important, the framework gives you the security that your analysis is a sound one.
The framework is built block by block from “first principles” so that you see clearly where
the analysis comes from and, by the end of the book, have a firm understanding of the
principles of fundamental analysis. You will also be able to distinguish good analysis from
poor analysis.

Practical Tools
This book is about understanding, but it is primarily about doing. Concepts and
frameworks are important only if they lead to analysis tools. Each chapter of the book ends
with a list of Key Concepts, but also with the Analyst’s Toolkit that summarizes the key
analysis tools in the chapter. By the end of the book, you will have a complete set of tools
for practical analysis. The Toolkit is efficiently organized so that the analyst proceeds in
a disciplined way with the assurance that his or her analysis is coherent and does not
overlook any aspect of the value generation in a firm. The book identifies too-simple
methods of analysis and shuns ad hoc methods. However, it also strives to develop simple
schemes, with a sense of trade-off between the benefit of more complicated analysis over
the cost. At all points in the book, methods are illustrated with applications to firms such as
Google, Cisco Systems, Nike, Microsoft, Coca-Cola, and many more.
Most of the analysis and valuation material in the book can be built into a spreadsheet.
So, as the book develops, you are given directions for building and embellishing a
spreadsheet program, with further instructions on the book’s Web site. By the end of the
book, you will have a comprehensive analysis and valuation product that you can apply to
almost any firm and use for active investing. A comprehensive guide to building
spreadsheets—Build Your Own Analysis Product (BYOAP)—is on the book’s Web site.
Off-the-shelf spreadsheet products are available (many with faults), but you will find it
much more satisfying to build your own, and certainly you will learn more this way.

Valuation and Strategy

The tools in the book are those that a security analyst outside the firm uses to advise clients
about investing in the firm. These analysts present their recommendations in an equity
research report. After studying this text, you will have the ability to write a persuasive,
state-of-the-art equity research report. But the tools are also those that a manager within a
firm uses to evaluate investments. The analyst outside the firm values the firm on the basis
of what he or she understands the firm’s strategy to be, while the manager within the firm
uses the same tools to evaluate investments and choose the strategy. The techniques that are
used to assess the value of a firm’s strategy are also the techniques used to choose among
strategies, so this book integrates valuation analysis and strategy analysis.

Accounting-Based Approach to Valuation

Valuation texts typically use discounted cash flow analysis to value businesses. However,
analysts typically forecast earnings to indicate business value, and equity research reports
primarily discuss firms’ earnings, not their cash flows, to get a sense of whether the firm is
making money for investors. “Buy earnings” is indeed the mantra of investing. The stock
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viii Preface

market focuses on earnings; analysts’ and managements’ earnings forecasts drive share
prices, and when a firm announces earnings that are different from analysts’ earnings
estimates, the stock price responds accordingly. Revelations of overstated earnings result in
large drops in stock prices—as with the Xerox, Enron, Qwest, WorldCom, Krispy Kreme, and
other accounting scandals that broke as the stock market bubble burst. Investment houses are
increasingly moving from cash flow valuation models to earnings-based valuation models.
This book focuses on earnings forecasting and the methods for converting earnings
forecasts to a valuation. The reason will become clear as you proceed through the book:
Earnings, appropriately measured, give a better indication of the value generation in
a business, so the analysis of earnings prospects leads to a firmer understanding of
fundamental value. Graham and Dodd and the fundamental analysts of earlier generations
emphasized “earnings power.” This book maintains that focus, but in a way that is
consistent with the principles of modern finance. One must be careful, for there is a danger
in paying too much for earnings.

The Quality of the Accounting

With an understanding of how accounting should work, you will develop an appreciation in
this book of what is good accounting and what is poor accounting. By the end of the book
you will recognize the defects in financial statements that are issued by firms and will have
developed a critique of the “generally accepted accounting principles” and disclosure rules
that determine what is in the statements. You will also understand how the accounting in
reports can be distorted, as well as discover tools that detect the distortion and give you an
indication of the quality of the accounting that a firm uses.

Integrating Finance and Accounting

Financial statements are prepared according to the dictates of accounting principles, and
you take accounting courses to learn these accounting principles. Your appreciation of
financial statements from these courses is often in terms of the accounting used to prepare
them, not in terms of what the financial statements say about investing in businesses.
Principles of finance guide investment analysis and you typically take finance courses to
learn these principles. However, the investment analysis in these courses often does not
employ financial statements or accounting concepts in any systematic way. Often you see
finance and accounting as distinct or, if you see them as related, the relationship is vague in
your mind. Finance courses are sometimes dismissive of accounting, while accounting
courses sometimes propose analysis that violates the principles of finance. This book
integrates your learning from finance and accounting courses. By integrating financial
statement analysis and fundamental analysis, the book combines accounting concepts with
finance concepts. Accounting is viewed as a matter of accounting for value and the
accounting for value is appropriated for investment analysis. The organized structure of the
financial statements helps organize fundamental analysis. Accounting principles for
measuring balance sheets and income statements are incorporated as principles for
measuring value. All analysis is performed in a way that is consistent with the principles of
modern finance and with an appreciation of what is good accounting and what is poor
accounting.

Activist Approach
Investment texts often take the view that capital markets are “efficient,” such that market
prices always reflect the underlying value of the securities traded. These texts are primarily
concerned with measuring risk, not with valuation. The investor is viewed as relatively
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Preface ix

passive, accepting prices as fair value, concerned primarily with managing risk through
asset allocation. This text takes an activist’s perspective. Active investors do not “assume
that the market is efficient.” Rather, active investors challenge the market price with sound
analysis, checking whether that price is a fair price. Indeed, they exploit what is perceived
to be mispricing in the market to earn superior returns. Active investors adopt the creed of
fundamental analysts: Price is what you pay, value is what you get. They believe that an
important risk in equity investing is the risk of paying too much for a share, so active
investors seek to gain an appreciation of value independently of price. Whether or not the
market is efficient, you will find this perspective engaging.

Negotiating with Mr. Market

Benjamin Graham saw equity investing as a matter of “negotiating with Mr. Market” over
the price to pay. The book shows how to carry out these negotiations. In the spirit of
comparing price with value, analysts typically think of calculating a “true” intrinsic value
for a stock and comparing that to Mr. Market’s price quote. This is not bad thinking but,
with so many uncertainties involved, establishing one true number for the intrinsic value
with confidence is difficult. The book takes a different approach: Understand how earnings
forecasts relate to value, reverse engineer the market price to understand the forecast that
Mr. Market is making, and then challenge that forecast. This recognizes that valuation is
not a game against nature, but rather a game against other investors; one does not have to
find the true value but rather what other investors are thinking. Financial statement analysis
that challenges this thinking is then the focus in the dialogue with Mr. Market.

New to This Edition

This edition of the book emphasizes this theme of challenging market prices. A new chapter,
Chapter 7, applies the valuation models of Chapters 5 and 6 as tools for active investing. The
process is refined in Part Three of the book after the financial statement analysis of Part Two,
for it is this financial statement analysis that elicits the information to evaluate whether
market prices are reasonable. Many of the active investing themes and tools of my recent
book, Accounting for Value (Columbia University Press, 2011), are elaborated upon in this
edition.
Here are the significant changes for the fifth edition, now running to 20 chapters rather
than 19:
• The new Chapter 7—“Valuation and Active Investing”—has been added to Part One of the
book.
• Chapters 5 and 6 on valuation have been written more succinctly with some of the material
moved to the new Chapter 7.
• Material in all chapters has been updated to incorporate new accounting standards.
• Comparisons between U.S. GAAP accounting and international (IFRS) accounting are
made where relevant.
• Examples, illustrations, and graphical material have been updated, now current as of 2010.
• New cases have been added to a number of chapters and the cases in earlier editions have
been updated to 2010.
• New end-of-chapter exercises have been added.
• Chapter 15 (previously Chapter 14) on simple forecasting and valuation has been
extensively revised and simplified.
• Chapter 19 on risk and return in equity investing returns to the theme of active investing.
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x Preface

When I wrote the first edition of this book (in 1999), world equity markets were
experiencing what, in retrospect, is seen as a market bubble. The book was couched in
terms of challenging the high price-earnings and price-to-book ratios at that time with
fundamental analysis. The episode is an important historical lesson in overvaluation, so that
perspective continues in this edition, beginning in Chapter 1. But since then we have
experienced not only the bursting of that bubble, but also a credit crisis and a plunge in
stock prices, with price multiples now lower than historical benchmarks. This edition thus
emphasizes that the analysis techniques it offers are just as applicable to challenging
underpricing as well as overpricing. It also warns of the risk of investing in uncertain times
and points out that, just as bubbles can perpetuate for some time, so can depressed prices.

The Overview
Chapter 1 introduces you to financial statement analysis and fundamental analysis, and sets
the stage for the rest of the book. Chapter 2 introduces you to the financial statements. The
remainder of the book is in five parts:
• Part One (Chapters 3–7) develops the thinking that is necessary to perform fundamental
analysis. It integrates finance concepts with accounting concepts and shows you how the
structure of accounting can be exploited for valuation analysis. Good thinking about
valuation is captured in a valuation model, so this part of the book introduces accrual-
accounting valuation models that provide the framework for the practical analysis that follows
in the rest of the book. Alternative models are discussed as competing technologies, so you
develop an appreciation of the strength and weaknesses of alternative approaches. Part One
ends with an application of these models to active investing.
• Part Two (Chapters 8–13) lays out the financial statement analysis that identifies value
generation in a business and provides information for forecasting. In this part of the
book you will see the lens being focused on the business.
• Part Three (Chapters 14–16) deals with forecasting. The value of a firm and its shares
is based on the payoffs it is expected to yield investors; thus, using the information from
the financial statement analysis, this part of the book shows you how to forecast payoffs.
The forecasting is developed within a financial statement framework so that forecasting
is an exercise in pro forma financial statement analysis. The analysis then shows how to
convert forecasts into valuations of firms and their strategies.
• Part Four (Chapters 17 and 18) deals with accounting issues that arise with the use of
accounting-based valuation. It shows how to accommodate different accounting
methods for measuring earnings and how to analyze the quality of the accounting used
in financial statements.
• Part Five (Chapters 19 and 20) lays out the fundamental analysis of risk, both equity
risk and credit risk, and provides a pro forma analysis that integrates equity analysis and
credit analysis. Here, again, the emphasis is on active investing: How does the investor
handle risk in investing, particularly the risk of paying too much?

PUTTING IT ALL TOGETHER:

A TOOLKIT FOR ANALYSTS AND MANAGERS
The best way to tackle this book is to see yourself as putting together a Toolkit for
analyzing financial statements and valuing businesses and business strategies. As a
professional analyst or business planner, you want to be using the best technologies
available, to get an edge on the competition. So approach the book in the spirit of sorting
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Preface xi

out what are good methods and what are poor ones. You require methods that are practical
as well as conceptually sound.
As you read the text, you find answers to the following questions:
• How are fundamental values (or “intrinsic values”) estimated?
• How does one pull apart the financial statements to get at the relevant information to
value equities?
• What is the relevance of cash flows? Of dividends? Of book values? How are these
measures treated in a valuation?
• What is growth? How does one analyze growth? How does one value a growth firm?
• What are the pitfalls in buying growth?
• How does one challenge the growth expectations implicit in stock prices?
• How does ratio analysis help in valuation?
• How does profitability tie into valuation?
• How does one analyze the quality of financial reports?
• How does one deal with the accounting methods used in financial statements?
• How is financial analysis developed for strategy and planning?
• What determines a firm’s P/E ratio? How does one calculate what the P/E should be?
• What determines a firm’s market-to-book (P/B) ratio? How does one calculate what the
P/B should be?
• How does one evaluate risk? For equity? For debt?
• How does one evaluate an equity research report? What does a good one look like?
• How does one trade on fundamental information?

USING THE BOOK

Background Requirements
To comprehend the text material, you should have a basic course in financial accounting
and a basic course in finance. A second course in financial accounting and a course in
investments or corporate finance will be helpful but not necessary. Indeed, you may find
yourself motivated to take those courses after reading this book.

Chapter Features
The text is written with features designed to enhance your efforts in learning the material. Each
chapter of the book begins with a flow chart that lays out the material covered in the chapter and
connects that material to the preceding and upcoming chapters. This chart will help you see
clearly where you’ve been and where you are going, and how it all ties together. Each chapter also
opens with TheAnalyst’s Checklist, which has two lists: one covering the conceptual points in
the chapter and the other a set of tasks that you should be able to perform after working the
chapter. This outlines the goals of the chapter, setting you up for mastery of the material at hand.
Each chapter concludes with TheAnalyst’s Toolkit, a convenient resource complete with page
references, that summarizes the analysis tools in the chapter—ideal for studying and review.

End-of-Chapter Material
Each chapter ends with a set of concept questions, exercises, and minicases. Working through
this material will enhance your understanding considerably. These problems are designed, not
so much to test you, but to further your learning with practical analysis. Each problem makes
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xii Preface

a point. Concept questions reinforce the thinking in the chapter. Exercises apply methods
covered in the chapter. Drill Exercises lead you gently into the analysis. Applications focus
on issues involving specific companies. Minicases, designed for classroom discussion, are
more contextual and involve a broader set of issues, some involving ambiguity. They are
written more concisely than full cases so that you do not have to handle a large amount of
detail, and classroom time is used more efficiently to make the point. However, the minicases
involve considerable analysis and insight, providing stimulus for group discussion.
As with the chapter material, the Exercises and Minicases often use the same real world
companies to make different points in different parts of the book. To help you refer back to
earlier material on the same company, the Exercises and Minicases are marked with an
easy-to-identify Real World Connection tagline.

The Continuing Case

A continuing case for one company—Kimberly-Clark Corporation—weaves its way
through the book. At the end of each chapter (through Chapter 16), you receive a new
installment of the case which shows how the principles and methods in that chapter are
applied to Kimberly-Clark and build on the analysis of previous chapters. By the end, you
have a demonstration of the application of the book, in total, to one company as a model for
other companies. Work the case, then check your solution against that on the book’s Web site.

Web Site Reinforcement

The material in the text is supplemented with further analysis on the book’s Web site
at www.mhhe.com/penman5e. The Student Center on the Web site contains the following:
• Chapter supplements for each chapter in the book. The flow chart at the beginning of
each chapter of the text refers you to the Web site, and The Web Connection at the end
of each chapter summarizes what you will find in the supplements.
• Solutions to the Continuing Case.
• Additional exercises for each chapter, along with solutions. Work these exercises and
correct yourself with the solutions to reinforce your learning.
• Accounting Clinics I–VII review accounting issues that are particularly relevant to
equity and credit analysis. Among the topics covered are accrual accounting, fair value
and historical cost accounting, accounting for debt and equity investments, accounting
for stock compensation, pension accounting, and the accounting for taxes.
• Build Your Own Analysis Product (BYOAP) on the Web site shows you how to build
your own financial statement analysis and valuation spreadsheet product using the
principles and methods in the book. It is not a final product that you can immediately
appropriate; rather it is a guidebook for constructing your own. As such, it is a learning
device; rather than mechanically applying a black-box product, you learn by doing. With
the completed product you can analyze financial statements; forecast earnings, residual
earnings, abnormal earnings growth, cash flows, and dividends; and then value firms and
strategies with a variety of techniques. Add your own bells and whistles. In short, the
product is the basis for preparing an equity research report and for carrying out due
diligence as a professional. You will find the building process will give you a feeling of
accomplishment, and the final product—of your own construction—will be a valuable
tool to carry into your professional life or to use for your own investing. Spreadsheet
engines for specific tasks are available in the chapter supplements on the Web page for
each chapter. Off-the-shelf products are also available. eVal 2000, authored by Russell
Lundholm and Richard Sloan, is available through McGraw-Hill/Irwin. Also check out
pen25311_fm_i-xxvii.qxd 2/2/12 4:20 PM Page xiii

Preface xiii

the spreadsheet tool of Dan Gode and James Ohlson, at www.godeohlson.com, that
more closely follows the scheme in this book.
• Links to firms’ financial statements and to many other sources of financial information.
You will also find engines to screen and analyze stocks and to help you build your own
analysis tools.
• Market Insight (Educational Version) from Standard & Poor’s contains financial
information on 370 companies. Access codes are available from your instructor.

Resources for Instructors

The book is accompanied by ancillaries that support the teaching and learning. The
Instructor Center on the book’s Web site contains the following:
• Solutions Manual with detailed solutions to the end-of-chapter material.
• Teaching Notes with advice for teaching from the book, alternative course outlines, a
number of teaching tools, and a commentary on each chapter of the book.
• PowerPoint slides for each chapter.
• Test Bank containing further problems and exercises.
• Accounting Clinics to cover the accounting issues in the book in more detail.
• Chapter Notes for each chapter.
pen25311_fm_i-xxvii.qxd 2/2/12 4:20 PM Page xiv

Acknowledgments

This book capsulates what I have learned as a student of the subject. I am indebted to many
writers and professors for that learning. The book has the investment philosophy of
Graham, Dodd, and Cottle’s Security Analysis, the book assigned for my first finance course
as an undergraduate. It also incorporates the accounting concepts from my study of
accounting theory at the University of Queensland and from reading the classics of Paton
and Littleton, Sprouse and Moonitz, and Edwards and Bell, to name a few. It reflects my
training in the principles of “modern finance,” first as a graduate student at the University
of Chicago and subsequently from colleagues at Berkeley.
I have learned much from carrying out research on accounting and valuation. In
seminars, workshops, and informal discussions, I have been stimulated by the insights of
many colleagues at universities around the world. I have a particular debt to Jim Ohlson,
whose theoretical work on accounting valuation models has inspired me, as have our many
conversations on research and teaching. I am also indebted to my students at Berkeley, the
London Business School, and Columbia University, who have worked with draft versions
of this book and given me valuable feedback. Peter Easton and his students at The Ohio
State University, the University of Melbourne, and the University of Chicago also used
drafts of the first edition and were generous with their comments.
My appreciation also goes to Lorraine Seiji at Berkeley, whose dedication to preparing the
manuscript for the first edition was outstanding. Terrence Gabriel and Clarissa Peña at
Columbia provided similar support for this edition. Luis Palencia, Doron Nissim, Nir Yehuda,
Paul Tylkin, and Mingcherng Deng have helped in preparing the graphical material for the
various editions, and Feng Chen, Mingcherng Deng, Guohua Jiang, Siyi Li, and Nir Yehuda
provided valuable accuracy checking and help with supporting materials. To them all I
am grateful. Nancy Banks, as always, gave strong support. The administrations at Berkeley,
the London Business School, and the Columbia Business School, and my colleagues at these
schools, lent support at various stages of the book’s preparation. The entire team at McGraw-
Hill/Irwin have been outstanding. Stewart Mattson has overseen the development of the book
with an expert hand. Instructors, too many to mention, gave feedback on their experience with
earlier editions.
Anonymous reviewers of the various editions went out of their way to help improve the
manuscript. I am very thankful to them. Now identified, they are listed below. Bruce
Johnson requires special mention. He went through the manuscript for the first edition word
by word, challenged it, and persuaded me to make numerous improvements.

Pervaiz Alam Agnes Cheng

Kent State University University of Houston
Holly Ashbaugh Michael Clement
University of Wisconsin, Madison University of Texas at Austin
Scott Boylan Richard Dumont
Washington and Lee University Post University
Shelly Canterbury Peter Easton
George Mason University The Ohio State University

xiv
pen25311_fm_i-xxvii.qxd 2/2/12 4:20 PM Page xv

Acknowledgments xv

Jocelyn Evans Jane Ou

College of Charleston Santa Clara University
Patricia Fairfield Richard Sloan
Georgetown University University of Michigan
John Giles Lenny Soffer
North Carolina State University, Raleigh Northwestern University
Greg Sommers
Richard Gore
Southern Methodist University
Boise State University
Theodore Sougiannis
Bruce Johnson
University of Illinois
University of Iowa
Carolyn Spencer
Sok-Hyon Kang
Dowling College
George Washington University
Thomas Stober
Sungsoo Kim
University of Notre Dame
Rutgers University, Camden
K. R. Subramanyan
Charles Lee
University of Southern California
Cornell University
Gary Taylor
Yong Lee
University of Alabama
University of Houston at Victoria
Mark Trombley
Gerald Lobo
University of Arizona
Syracuse University
James Wahlen
G. Brandon Lockhart
Indiana University
University of Nebraska, Lincoln
Clark Wheatley
Ronald King
Florida International University, Miami
Washington University
Scott Whisenant
Arijit Mukherji
University of Houston
University of Minnesota
Lin Zheng
David Ng
Mercer University, Atlanta
Cornell University, Ithaca

Stephen H. Penman
Columbia University
pen25311_fm_i-xxvii.qxd 2/2/12 4:20 PM Page xvi
pen25311_fm_i-xxvii.qxd 2/2/12 4:20 PM Page xvii

Brief Contents
List of Cases xxv PART THREE
List of Accounting Clinics xxvi Forecasting and Valuation Analysis 434
1 Introduction to Investing and Valuation 2 14 The Value of Operations and the
Evaluation of Enterprise Price-to-Book
2 Introduction to the Financial Ratios and Price-Earnings Ratios 436
Statements 32
15 Anchoring on the Financial Statements:
Simple Forecasting and Simple
PART ONE Valuation 480
Financial Statements and Valuation 72
16 Full-Information Forecasting, Valuation,
3 How Financial Statements and Business Strategy Analysis 504
Are Used in Valuation 74
4 Cash Accounting, Accrual PART FOUR
Accounting, and Discounted Cash
Accounting Analysis and Valuation 552
Flow Valuation 110
17 Creating Accounting Value and
5 Accrual Accounting and Valuation:
Economic Value 554
Pricing Book Values 140
18 Analysis of the Quality
6 Accrual Accounting and Valuation:
of Financial Statements 590
Pricing Earnings 178
7 Valuation and Active Investing 210 PART FIVE
The Analysis of Risk and Return 640
PART TWO 19 The Analysis of Equity Risk
The Analysis of Financial Statements 232 and Return for Active Investing 642
8 Viewing the Business Through 20 The Analysis of Credit Risk
the Financial Statements 234 and Return 680
9 The Analysis of the Statement
of Shareholders’ Equity 258 APPENDIX
10 The Analysis of the Balance A Summary of Formulas 709
Sheet and Income Statement 292
11 The Analysis of the Cash Flow INDEX 725
Statement 342
12 The Analysis of Profitability 364
13 The Analysis of Growth and
Sustainable Earnings 392

xvii
pen25311_fm_i-xxvii.qxd 2/2/12 4:20 PM Page xviii

Contents

List of Cases xxv The Income Statement 36

The Cash Flow Statement 40
List of Accounting Clinics xxvi
The Statement of Shareholders’ Equity 40
The Footnotes and Supplementary
Chapter 1 Information to Financial Statements 41
Introduction to Investing and Valuation 2 The Articulation of the Financial Statements:
How the Statements Tell a Story 42
Investment Styles and Fundamental Analysis 3
Measurement in the Financial Statements 44
Bubble, Bubble, Toil, and Trouble 6
The Price-to-Book Ratio 44
How Bubbles Work 7
Measurement in the Balance Sheet 46
Analysts During the Bubble 8
Measurement in the Income Statement 46
More Toil and Trouble 8
The Price-Earnings Ratio 50
Fundamental Analysis Anchors Investors 9
Accounting as an Anchor: Don’t Mix
The Setting: Investors, Firms, Securities,
What You Know with Speculation 51
and Capital Markets 10
Tension in Accounting 53
The Business of Analysis:
Accounting Quality 54
The Professional Analyst 12
Summary 55
Investing in Firms: The Outside Analyst 12
The Web Connection 55
Investing Within Firms: The Inside Analyst 13
Key Concepts 56
The Analysis of Business 14
The Analyst’s Toolkit 57
Strategy and Valuation 15
A Continuing Case: Kimberly-Clark Corporation 57
Mastering the Details 16
Concept Questions 63
The Key Question: Sustainability
Exercises 63
of Competitive Advantage 17
Minicase 69
Financial Statements: The Lens on
the Business 17
Choosing a Valuation Technology 18
PART ONE
Guiding Principles 18 FINANCIAL STATEMENTS
Anchoring Value on the Financial Statements 20 AND VALUATION 72
How to Use This Book 21
An Outline of the Book 21 Chapter 3
The Web Connection 22 How Financial Statements
Key Concepts 22 Are Used in Valuation 74
A Continuing Case: Kimberly-Clark Corporation 24
The Analyst’s Checklist 75
Concept Questions 27
Multiple Analysis 76
Exercises 28
The Method of Comparables 76
Minicase 30
Screening on Multiples 79
Chapter 2 Asset-Based Valuation 82
Fundamental Analysis 84
Introduction to the Financial Statements 32
The Process of Fundamental Analysis 85
The Analyst’s Checklist 33 Financial Statement Analysis, Pro Forma
The Form of the Financial Statements 34 Analysis, and Fundamental Analysis 86
Introducing Nike, Inc. 34 The Architecture of Fundamental Analysis:
The Balance Sheet 34 The Valuation Model 87
xviii
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Terminal Investments and Going-Concern Prototype Valuations 142

Investments 88 Valuing a Project 142
Valuation Models for Terminal Investments 89 Valuing a Savings Account 143
Valuation Models for Going-Concern The Normal Price-to-Book Ratio 144
Investments 91 A Model for Anchoring Value on Book Value 145
Criteria for a Practical Valuation Model 91 Residual Earnings Drivers
What Generates Value? 92 and Value Creation 147
Valuation Models, the Required Return, A Simple Demonstration and a
and Asset Pricing Models 96 Simple Valuation Model 150
Summary 97 Applying the Model to Equities 151
The Web Connection 97 The Forecast Horizon and the
Key Concepts 98 Continuing Value Calculation 152
The Analyst’s Toolkit 99 Beware of Paying Too Much for Growth 155
A Continuing Case: Kimberly-Clark Corporation 99 Converting Analysts’ Forecasts
Concept Questions 100 to a Valuation 156
Exercises 101 Build Your Own Valuation Engine 157
Minicases 104 Applying the Model to Projects and Strategies 159
Appendix The Required Return and Features of the Residual Earnings Valuation 161
Asset Pricing Models 106 Book Value Captures Value and Residual
Earnings Captures Value Added to
Chapter 4 Book Value 161
Cash Accounting, Accrual Accounting, Protection from Paying Too Much for
and Discounted Cash Flow Valuation 110 Earnings Generated by Investment 162
Protection from Paying Too Much
The Analyst’s Checklist 111
for Earnings Created by the Accounting 163
The Dividend Discount Model 111
Capturing Value Not on the Balance
The Discounted Cash Flow Model 114
Sheet—for All Accounting Methods 164
Free Cash Flow and Value Added 117
Residual Earnings Are Not Affected by
The Statement of Cash Flows 119
Dividends, Share Issues, or Share
The Cash Flow Statement under IFRS 122
Repurchases 165
Forecasting Free Cash Flows 123
What the Residual Earnings Model Misses 165
Cash Flow, Earnings, and Accrual Accounting 124
The Web Connection 165
Earnings and Cash Flows 124
Summary 165
Accruals, Investments, and the
Key Concepts 166
Balance Sheet 127
The Analyst’s Toolkit 166
Summary 129
A Continuing Case: Kimberly-Clark Corporation 167
The Web Connection 129
Concept Questions 167
Key Concepts 130
Exercises 168
The Analyst’s Toolkit 130
Minicases 173
A Continuing Case: Kimberly-Clark Corporation 131
Concept Questions 131
Exercises 132 Chapter 6
Minicase 138 Accrual Accounting and Valuation:
Pricing Earnings 178
Chapter 5
The Analyst’s Checklist 179
Accrual Accounting and Valuation:
The Concept Behind the Price-Earnings Ratio 179
Pricing Book Values 140 Beware of Paying Too Much for Earnings
The Analyst’s Checklist 141 Growth 180
The Concept Behind the Price-to-Book Ratio 141 From Price-to-Book Valuation to
Beware of Paying Too Much for Earnings 141 P/E Valuation 180
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Prototype Valuation 181 A Continuing Case: Kimberly-Clark Corporation 223

The Normal Forward P/E Ratio 183 Concept Questions 224
The Normal Trailing P/E Ratio 184 Exercises 225
A Poor P/E Model 185 Minicases 229
A Model for Anchoring Value on Earnings 185
Measuring Abnormal Earnings Growth 187
A Simple Demonstration and a Simple PART TWO
Valuation Model 188 THE ANALYSIS OF FINANCIAL
Anchoring Valuation on Current Earnings 189 STATEMENTS 232
Applying the Model to Equities 190
Converting Analysts’ Forecasts
to a Valuation 191 Chapter 8
Build Your Own Valuation Engine 192 Viewing the Business Through
Features of the Abnormal Earnings the Financial Statements 234
Growth Model 194
The Analyst’s Checklist 235
Buy Earnings 195
Business Activities: The Cash Flows 236
Abnormal Earnings Growth Valuation
The Reformulated Cash Flow Statement 240
and Residual Earnings Valuation 195
The Reformulated Balance Sheet 241
Abnormal Earnings Growth
Business Activities: All Stocks and Flows 242
Is Not Affected by Dividends,
The Reformulated Income Statement 243
Share Issues, or Share Repurchases 196
Accounting Relations That Govern
Accounting Methods and Valuation 196
Reformulated Statements 243
The Fed Model 197
The Sources of Free Cash Flow and the
PEG Ratios 199
Disposition of Free Cash Flow 244
Summary 200
The Drivers of Dividends 244
The Web Connection 201
The Drivers of Net Operating Assets
Key Concepts 201
and Net Indebtedness 245
The Analyst’s Toolkit 201
Tying It Together for Shareholders:
A Continuing Case: Kimberly-Clark Corporation 202
What Generates Value? 246
Concept Questions 202
Build Your Own Analysis Engine 248
Exercises 203
Summary 250
Minicase 208
The Web Connection 250
Key Concepts 251
Chapter 7 The Analyst’s Toolkit 251
Valuation and Active Investing 210 A Continuing Case: Kimberly-Clark Corporation 252
Concept Questions 252
The Analyst’s Checklist 211
Exercises 253
How the Fundamental Investor Operates 211
Common Misconceptions About Valuation 211
Applying Fundamental Principles 213 Chapter 9
Challenging Speculation in the Market Price 213
The Analysis of the Statement
Reverse Engineering the S&P 500 215
of Shareholders’ Equity 258
Challenging the Price of a Stock 218
Reverse Engineering with the Abnormal The Analyst’s Checklist 259
Earnings Growth Model 221 Reformulating the Statement of Owners’ Equity 259
Build Your Own Active Investing Tool 222 Running with Nike 260
The Web Connection 222 Reformulation Procedures 260
Summary 222 Dirty-Surplus Accounting 263
Key Concepts 223 Comprehensive Income Reporting
The Analyst’s Toolkit 223 Under U.S. GAAP and IFRS 265
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Ratio Analysis 266 Chapter 11

Payout and Retention Ratios 266
The Analysis of the Cash Flow Statement 342
Shareholder Profitability 267
Growth Ratios 267 The Analyst’s Checklist 343
Hidden Dirty Surplus 268 The Calculation of Free Cash Flow 343
Issue of Shares in Operations 268 GAAP Statement of Cash Flows and
Issue of Shares in Financing Activities 272 Reformulated Cash Flow Statements 345
Handling Diluted Earnings per Share 272 Reclassifying Cash Transactions 346
Share Transactions in Inefficient Markets 274 Tying It Together 351
The Eye of the Shareholder 275 Cash Flow from Operations 353
Build Your Own Analysis Engine 276 Summary 355
Accounting Quality Watch 276 The Web Connection 355
The Web Connection 278 Key Concepts 356
Summary 278 The Analyst’s Toolkit 356
Key Concepts 278 A Continuing Case: Kimberly-Clark Corporation 356
The Analyst’s Toolkit 279 Concept Questions 357
A Continuing Case: Kimberly-Clark Corporation 280 Exercises 357
Concept Questions 281 Minicase 362
Exercises 282
Minicase 288 Chapter 12
The Analysis of Profitability 364
Chapter 10 The Analyst’s Checklist 365
The Analysis of Return on Common Equity 365
The Analysis of the Balance
First-Level Breakdown: Distinguishing Financing
Sheet and Income Statement 292 and Operating Activities and the Effect
The Analyst’s Checklist 293 of Leverage 366
Reformulation of the Balance Sheet 293 Financial Leverage 366
Issues in Reformulating Balance Sheets 294 Operating Liability Leverage 368
Strategic Balance Sheets 301 Summing Financial Leverage and
Reformulation of the Income Statement 303 Operating Liability Leverage Effects on
Tax Allocation 304 Shareholder Profitability 370
Issues in Reformulating Income Return on Net Operating Assets and
Statements 308 Return on Assets 371
Value Added to Strategic Balance Sheets 312 Financial Leverage and
Residual Income from Operations 312 Debt-to-Equity Ratios 373
Comparative Analysis of the Balance Sheet Second-Level Breakdown: Drivers
and Income Statement 314 of Operating Profitability 373
Common-Size Analysis 315 Third-Level Breakdown 376
Trend Analysis 316 Profit Margin Drivers 376
Ratio Analysis 318 Turnover Drivers 376
Build Your Own Analysis Engine 321 Key Drivers 379
Summary 321 Borrowing Cost Drivers 380
The Web Connection 322 Build You Own Analysis Engine 381
Key Concepts 322 The Web Connection 382
The Analyst’s Toolkit 323 Summary 382
A Continuing Case: Kimberly-Clark Corporation 324 Key Concepts 382
Concept Questions 325 The Analyst’s Toolkit 383
Exercises 325 A Continuing Case: Kimberly-Clark Corporation 383
Minicases 334 Concept Questions 384
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Exercises 385 A Modification to Residual Earnings Forecasting:

Minicase 391 Residual Operating Income 438
The Drivers of Residual Operating Income 441
Chapter 13 A Modification to Abnormal Earnings
Growth Forecasting: Abnormal Growth
The Analysis of Growth and
in Operating Income 443
Sustainable Earnings 392 Abnormal Growth in Operating Income and
The Analyst’s Checklist 393 the “Dividend” from Operating Activities 443
What Is Growth? 393 Eye on the Future: Sustainable Income 445
Warnings About Growth 394 The Cost of Capital and Valuation 445
Cutting to the Core: Sustainable Earnings 396 The Cost of Capital for Operations 446
Core Operating Income 396 The Cost of Capital for Debt 447
Issues in Identifying Core Operating Income 397 Operating Risk, Financing Risk, and the
Core Operating Profitability 404 Cost of Equity Capital 448
Core Borrowing Cost 406 Financing Risk and Return and the
Analysis of Growth 407 Valuation of Equity 450
Growth Through Profitability 407 Leverage and Residual Earnings Valuation 450
Operating Leverage 408 Leverage and Abnormal Earnings Growth
Analysis of Changes in Financing 409 Valuation 451
Analysis of Growth in Shareholders’ Equity 409 Leverage Creates Earnings Growth 456
Growth, Sustainable Earnings, and the Evaluation Debt and Taxes 459
of P/B Ratios and P/E Ratios 411 Mark-to-Market Accounting: A Tool for
How Price-to-Book Ratios and Incorporating the Liability for Stock
Trailing P/E Ratios Articulate 411 Options in Valuation 461
Trailing Price-Earnings Ratios Enterprise Multiples 463
and Transitory Earnings 414 Enterprise Price-to-Book Ratios 463
P/E Ratios and the Analysis of Enterprise Price-Earnings Ratios 465
Sustainable Earnings 416 Summary 468
Price-to-Book and Growth 416 The Web Connection 468
Summary 417 Key Concepts 469
The Web Connection 417 The Analyst’s Toolkit 469
Key Concepts 418 A Continuing Case: Kimberly-Clark Corporation 470
The Analyst’s Toolkit 419 Concept Questions 471
A Continuing Case: Kimberly-Clark Corporation 419 Exercises 472
Concept Questions 420 Minicase 477
Exercises 421
Minicases 425
Chapter 15
Anchoring on the Financial Statements:
PART THREE Simple Forecasting and Simple
FORECASTING AND VALUATION Valuation 480
ANALYSIS 434 The Analyst’s Checklist 481
Simple Forecasts and Simple Valuations 482
Chapter 14 Introducing PPE, Inc. 482
The Value of Operations and the The No-Growth Forecast and Valuation 483
The Growth Forecast and Valuation 484
Evaluation of Enterprise Price-to-Book
Simple Forecasting: Adding information to
Ratios and Price-Earnings Ratios 436
Financial Statement Information 488
The Analyst’s Checklist 437 Weighed-Average Forecasts of Growth 488
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Simple Valuations with Short-Term PART FOUR

and Long-Term Growth Rates 488
ACCOUNTING ANALYSIS
Growth in Sales as a Simple Forecast
AND VALUATION 552
of Growth 489
Information in Analysts’ Forecasts 490
Chapter 17
Simple Valuation as an Analysis Tool 491
Sensitivity Analysis 491 Creating Accounting Value and
Reverse Engineering to Challenge Economic Value 554
the Market Price 491 The Analyst’s Checklist 555
Summary 492 Value Creation and the Creation
The Web Connection 493 of Residual Earnings 555
Key Concepts 493 Accounting Methods, Price-to-Book Ratios,
The Analyst’s Toolkit 493 Price-Earnings Ratios, and the Valuation
A Continuing Case: Kimberly-Clark Corporation 494 of Going Concerns 558
Concept Questions 494 Accounting Methods with a Constant
Exercises 494 Level of Investment 558
Minicases 500 Accounting Methods with a Changing
Level of Investment 561
Chapter 16 An Exception: LIFO Accounting 565
Full-Information Forecasting, Valuation, Hidden Reserves and the Creation of Earnings 566
and Business Strategy Analysis 504 Conservative and Liberal Accounting
in Practice 570
The Analyst’s Checklist 505 LIFO Versus FIFO 571
Financial Statement Analysis: Focusing the Lens Research and Development in the
on the Business 505 Pharmaceuticals Industry 572
1. Focus on Residual Operating Income Expensing Goodwill and Research and
and Its Drivers 506 Development Expenditures 573
2. Focus on Change 507 Liberal Accounting: Breweries and Hotels 574
3. Focus on Key Drivers 514 Profitability in the 1990s 574
4. Focus on Choices Versus Conditions 515 Economic-Value-Added Measures 575
Full-Information Forecasting and Accounting Methods and the Forecast Horizon 575
Pro Forma Analysis 515 The Quality of Cash Accounting and
A Forecasting Template 520 Discounted Cash Flow Analysis 576
Features of Accounting-Based Valuation 525 Growth, Risk, and Valuation 577
Value Generated in Share Transactions 526 Summary 578
Mergers and Acquisitions 527 The Web Connection 579
Share Repurchases and Buyouts 528 Key Concepts 579
Financial Statement Indicators and Red Flags 528 The Analyst’s Toolkit 580
Business Strategy Analysis and Pro Forma Concept Questions 580
Analysis 530 Exercises 581
Unarticulated Strategy 530 Minicase 586
Scenario Analysis 531
The Web Connection 532 Chapter 18
Summary 532 Analysis of the Quality
Key Concepts 533 of Financial Statements 590
The Analyst’s Toolkit 533
A Continuing Case: Kimberly-Clark Corporation 534 The Analyst’s Checklist 591
Concept Questions 534 What Is Accounting Quality? 591
Exercises 535 Accounting Quality Watch 592
Minicases 542 Five Questions About Accounting Quality 593
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Cutting Through the Accounting: Strategy and Risk 660

Detecting Income Shifting 594 Discounting for Risk 660
Separating What We Know from Price Risk 661
Speculation 597 Market Inefficiency Risk 661
Prelude to a Quality Analysis 598 Liquidity Risk 664
Quality Diagnostics 600 Inferring Expected Returns for Active Investing 664
Diagnostics to Detect Manipulated Sales 603 Growth-Return Profiles 666
Diagnostics to Detect Manipulation Finessing the Required Return Problem 667
of Core Expenses 604 Evaluating Implied Expected Returns with
Diagnostics to Detect Manipulation Value-at-Risk Profiles 667
of Unusual Items 612 Investing Within Risk Classes 668
Detecting Transaction Manipulation 614 Beware of Paying for Risky Growth 668
Core Revenue Timing 614 Expected Returns in Uncertain Times 670
Core Revenue Structuring 614 Summary 670
Core Expense Timing 615 The Web Connection 671
Releasing Hidden Reserves 615 Key Concepts 671
Other Core Income Timing 616 The Analyst’s Toolkit 672
Unusual Income Timing 616 Concept Questions 672
Organizational Manipulation: Off-Balance- Exercises 672
Sheet Operations 616 Minicase 678
Justifiable Manipulation? 617
Disclosure Quality 617 Chapter 20
Quality Scoring 618 The Analysis of Credit Risk and Return 680
Abnormal Returns to Quality Analysis 620
Summary 621 The Analyst’s Checklist 681
The Web Connection 621 The Suppliers of Credit 681
Key Concepts 621 Financial Statement Analysis for Credit Evaluation 682
Reformulated Financial Statements 682
The Analyst’s Toolkit 622
Short-Term Liquidity Ratios 684
Concept Questions 623
Long-Term Solvency Ratios 686
Exercises 624
Operating Ratios 687
Minicases 633
Forecasting and Credit Analysis 687
Prelude to Forecasting: The Interpretive
PART FIVE Background 687
THE ANALYSIS OF RISK Ratio Analysis and Credit-Scoring 688
AND RETURN 640 Full-Information Forecasting 692
Required Return, Expected Return, and Active
Chapter 19 Debt Investing 695
The Analysis of Equity Risk Active Bond Investing 696
and Return for Active Investing 642 Liquidity Planning and Financial Strategy 696
The Web Connection 697
The Analyst’s Checklist 643
Summary 697
The Required Return and the Expected Return 643
Key Concepts 698
The Nature of Risk 644
The Analyst’s Toolkit 698
The Distribution of Returns 644
Concept Questions 699
Diversification and Risk 648
Exercises 699
Asset Pricing Models 649
Minicase 704
Fundamental Risk 651
Risk to the Return on Common Equity 653 Appendix
Growth Risk 654
Value-at-Risk Profiling 654
A Summary of Formulas 709
Adaptation Options and Growth Options 659 Index 725
Exploring the Variety of Random
Documents with Different Content
authority upon these earlier periods[344], Duccio, the Sienese, and
Cimabue, the Florentine, endeavoured to assimilate the few remains
of antique drawing, which was grounded on laws of perspective and
anatomical precision, and so far as possible, to rejuvenate the same
in their own genius. They "instinctively recognized the value of such
drawings, but strove to soften the extreme insistence[345] of their
ossification, comparing such insufficiently comprehended traits with
the life such as we find it in fact or suggestion when face to face
with their own productions[345]." Such are merely the first and
mediating efforts of art to rise from the inflexibility of a type to
lifelike and individual expression.
(β) The further step of advance consists in the complete severation
from those previous Greek examples, in the full acceptance,
relatively both to the entire conception and execution of what is
distinctively human and individual, and along with this in the
profounder suitability of human characters and forms which was
gradually evolved to express the religious content thus to be
expressed.
(αα) It is here before all we must draw attention to the great
influence which Giotto and his pupils exercised. Giotto, along with
the changes he effected in respect to modes of conception and
composition, brought about a reform in the art of preparing colours.
The later Greeks probably, such at least is the result of chemical
analysis, made use of wax either as a medium of colour, or as a kind
of varnish[346], and from this we get the yellow-green and obscure
general tone, which is not sufficiently explained by the action of
lamplight[347]. Giotto wholly dispensed with this glutinous medium of
the Greek painters, and used instead, when preparing his
colours[348], the clarified milk of young shoots, unripe figs, and
other less oliginous limes[349], which Italian painters of the early
Middle Ages had used, very likely even before they strenuously
imitated the Byzantines[350]. A medium of this kind had no
darkening effect on the colours, but left their luminosity and clarity
unimpaired. Still more important was the reform effected by Giotto
in Italian painting with respect to selection of subjects and their
manner of presentment. Ghiberti himself praises Giotto for having
abandoned the rude style of the Greeks, and without leaning in this
direction to an excess having introduced the truth and grace of
Nature. Boccaccio, too, says of him that Nature is unable to create
anything that Giotto could not imitate to the point of deception[351].
In Byzantine pictures we can hardly detect a trace of natural
appearance. It was Giotto, then, who concentrated his attention on
what is present and actual, and compared the forms and effects
which he undertook to exhibit with Life as it existed around him. And
we may associate with this tendency the fact that during the times
of Giotto not only do we find that the state of society was more free
and intent on enjoyment, but that the veneration of several later
saints took its rise then, saints whose lives more or less fell in that
period[352]. It was such Giotto utilized particularly in emphasizing
the truthful presentment of the subjects of his art; there was, in
fact, thus the further demand suggested by the content itself that he
should bring into prominence the natural features of the bodily
presence and exhibit more defined characterization, action, passion,
situation, pose, and movement. What we find, however, to a relative
degree disappears from this attempt is that imposing religious
seriousness which is the fundamental characteristic of the phase of
art which it followed[353]. The things of the world receive a stage
and a wider opportunity for expression; and this is illustrated by the
way Giotto, under the influence of his age, found room for burlesque
along with so much that was pathetic. In this connection Herr von
Rumohr states rightly, "Under conditions of this description I am at a
loss to understand how certain critics, who have exclusively insisted
on this feature of Giotto's work, can so overestimate Giotto's
tendency and performance by claiming it as the most sublime effort
of modern art[354]." It is a great service of the above-named critic to
have once more placed in a true light the point of view from which
Giotto can be justly appreciated; he throughout makes us careful to
see, that in this tendency of Giotto to humanize and towards realism
he never really, as a rule, advances beyond a comparatively
subordinate stage in the process.
(ββ) The advance of painting continued under the manner of
conception for which Giotto was in the main responsible. The typical
representation of Christ, the apostles, and the more important
events which are reported us by the evangelists, were more and
more thrust into the background. Yet in another direction the
embrace of subject-matter was for that reason extended. As our
author expresses it: "All artists engaged in depicting the various
phases in the life of latter-day saints, such as their previous
worldliness, the sudden awakening of conscience, their entrance into
the life of piety and asceticism, the miracles of their lives, more
particularly after their decease, in the representation of which, as is
to be expected from the external conditions of the art, the
expression of the effect upon the living exceeded any suggestion of
invisible powder[355]." Add to this that the events of the Life and
Passion of Christ were not neglected. The birth and education of
Christ, the Madonna with her Child were exceptionally favoured
subjects, and were invested with a more life-like domesticity,
touched with a more intimate tenderness, revealed to us in the
medium of human feeling, and, moreover, to quote yet further: "In
the problems[356] suggested by the Passion it was not so much the
sublime and the triumph as simply the pathetic aspect which was
emphasized, a direct consequence of the enthusiastic wave of
sympathy with the earthly sufferings of the Saviour, to which Saint
Francis, both by example and teaching, had communicated a vital
energy hitherto unheard of."
In respect to a yet further advance towards the middle of the
fifteenth century, we have to lay exceptional stress on two names,
Masaccio and Fiesole. In the progressive steps through which the
religious content was vividly carried into the living forms of the
human figure and the animated expression of human traits Herr von
Rumohr[357] draws attention to two essential aspects as of most
importance. The one is the increase of rondure in all forms to which
it applies; the other he indicates as "a profounder penetration into
the articulation, the consistency, the most varied phases of the
charm and significance of the features of the human countenance."
Masaccio and Angelico da Fiesole between them were the first to
contribute effectively to the solution of this artistic problem, the
difficulty of which in its entirety exceeded the powers of any one
artist of that period. "Masaccio was mainly occupied with the
problem of chiaroscuro, and the rounding and effective articulations
of groups of figures. Angelico da Fiesole, on the other hand, devoted
himself to sounding the depths of ideal coherence, that indwelling
significance of human features, the mine of whose treasure he was
the first to open to painting[358]." The effort of Masaccio was not so
much one in the direction of grace as in that of imposing conception,
manliness, and under the instinctive need for unity of the entire
composition. The impulse of Fra Angelico was that of religious
intensity, a love severed from the world, a cloistral purity of emotion,
an exaltation and consecration of the soul. Vasari assures us in his
account of him that he never commenced work without prayer, and
never depicted the sufferings of the Redeemer without bursting into
tears[359]. We have, then as aspects of this advance of painting a
more exalted vitality and realism: but, on the other hand, the depth
of piety, the ingenuous devotion of the soul in its faith overran itself
and overpowered the freedom, dexterity, naturalism, and beauty of
the composition, pose, drapery, and colour. If the later development
was able to attain to a far more exalted and complete expression of
the spiritual consciousness, yet the epoch we are now considering
has never been surpassed in purity and innocence of religious feeling
and serious depth of conception. Many pictures of this time may very
well, by reason of the fact that the forms of life, which are used to
depict the religious intensity of soul-life, do not appear fully
adequate to this expression, give us something like a repulse; from
the point of view, however, of spiritual emotion, which is the most
vital source of these works of art, we have still less reason to fail to
acknowledge the naive purity, the intimacy with the most profound
depths of the truly religious content, the assuredness of faithful love
even under oppression and in grief, and oft, too, the charm of
innocence and blessedness, inasmuch as the epochs that followed it,
however much in other aspects of artistic perfection they made a
step forwards, yet for all that never secured again the perfection of
these previous excellencies, when once it had been lost.
(γγ) A third aspect attaches to the further development of the art, in
addition to those already discussed, which may be described as the
wider embrace of it relatively to the subjects accepted for
presentation by the new impulse. Just as what was regarded as
sacred had from the very commencement of Italian painting
approached more closely to reality by reason of the fact that men
whose lives fell about the time of the painters themselves were
declared to be saints, so too Art received into its own sphere other
aspects of reality and present life. Starting from that earliest phase
of pure spirituality and piety, an art whose aim was wholly absorbed
in the expression of such religious emotions, painting proceeded
more and more to associate the external life of the world with its
religious subject-matter. The gladsome, forceful self-reliance of the
citizen in the midst of his professional career, the business and the
craft that was bound up with such qualities, the freedom, the manly
courage and patriotism, in one word, his weal in the vital activities of
the Present, all this newly-awakened sense of human delight in the
virtues of civil life and its cheer and humour[360], this harmonized
sympathy with what was actual in both its aspects of ideal life[361]
and the external framework of the same, all this it was which
entered now into his artistic conceptions and modes of presenting
such and was made valid therein. It is in this spirit that the
enthusiasm for landscape backgrounds, views of cities, environment
of church buildings and palaces becomes a real instinct of artistic
life; the living portraits of famous savants, friends, statesmen,
artists, and other persons remarkable in their day for their wit and
vivacity find a place in religious compositions; traits borrowed from
both civil and domestic life are utilized with a greater or less degree
of freedom and dexterity; and if, no doubt, the spiritual aspect of the
religious content remained the foundation of all, yet the expression
of piety was no longer exclusively isolate, but is linked together with
the more ample life of reality and the open stage of the world[362].
No doubt we must add that by reason of this tendency the
expression of religious concentration and its intimate piety is
weakened, but art required also this worldly element in order to
arrive at its culminating point.
(γ) Out of this fusion of the more embracing reality of life with the
ideal material of religious emotion arose a new problem for genius to
solve, the complete solution of which was reserved for the great
masters of the sixteenth century. The supreme aim now was to bring
the intimate life of soul, the seriousness and the loftiness of religious
emotion into harmony with the animation, the actual presence of
characters and forms both in its corporeal and spiritual aspect, in
order that the bodily configuration in its pose, movement, and
colour, may not simply remain an external framework, but become
itself essentially an expression of spirit and life, and by virtue of that
expression, made throughout all its parts wholly the reflex of soul-
life no less than of external form, reveal a beauty without break or
interruption.
Among the masters of most distinction, who set before themselves
such an aim, we should pre-eminently mention Leonardo da Vinci. It
was he, who, by virtue of his artistic thoroughness, his almost over-
refined passion for detail, his exquisite delicacy of mind and feeling,
not only penetrated further than any other[363] into the mysteries of
the human form and the secrets of its expression, but, through his
equally profound knowledge of all the technique of a painter,
attained to an extraordinary infallibility in the employment of all the
means that his researches and practice had placed within his reach.
And, along with this, he was able to retain a reverential seriousness
in composing his religious subjects, so that his figures, however
much they present to us the ideal of a more complete and rounded
actuality, and disclose the expression of sweet, smiling joyfulness in
facial traits and the delicate rhythm of drapery, do not thereby
dispense with the dignity, which the worth and truth of religion
demand[364].
The most unflecked quality[365] of perfection reached in this
direction was, however, that first attained by Raphael. Herr von
Rumohr assigns more particularly to the artists of the Umbrian
School dating from the middle of the fifteenth century a mysterious
fascination, which no sympathetic nature can resist, and endeavours
to find the source of this attraction in the depth and tenderness of
feeling no less than the marvellous unity into which these painters
knew how to bring memories from the oldest essays of Christian art
of a style only very partially understood by them[366] with the milder
conceptions of a later time, and in this respect proved themselves
superior to the Tuscan, Lombard, and Venetian fellow artists of that
period[367]. It was just this expression of "flawless purity of soul and
absolute surrender to the yearning and enthusiastic flow of tender
feeling" to which Pietro Perugino, the master of Raphael, devoted his
artistic efforts, and succeeded by doing so in fusing the objectivity
and vitality of external forms, throughout all its actual realization and
in every detail, an aim which had previously received the most
marked attention in the elaborate work of the Florentines. Starting
from the work of Perugino, to whose artistic taste and style he
appears to have consistently adhered in his early work, Raphael
proceeded yet further to realize to the most consummate degree the
demand of the ideal above indicated. In other words we find united
in him the highest ecclesiastical feeling for the themes of religious
art and a complete knowledge and enthusiastic respect for natural
phenomena in all the animation of their colour and shape together
with an insight fully as great for the beauty of the antique. This
great admiration for the idealistic beauty of the ancients did not
bring him in any way to imitate and adapt to his work the forms
which Greek sculpture had elaborated in their perfection. What he
seized from it was simply the general principle of their free beauty
which in his hands was throughout suffused with a more individual
vitality more applicable to his art and with a type of expression more
deeply informed with soul-life, and at the same time with an open,
blithesome clarity and thoroughness, in all the detail of the
presentment that up to his time was as yet unknown among Italian
artists. In the elaboration and consistent fusion and coherence of
this ideal atmosphere he reached the highest point of his
attainment. On the other hand, in the magical charm of chiaroscuro,
in the exquisite tenderness and grace of soul-expression, of forms,
movements, and grouping, it is Correggio who most excels, while
the incomparable greatness of Titian consists in the wealth of
natural life that he displays, the illuminating bloom, fervency,
warmth, and power of his colour. We know nothing more delightful
than the naïveté of Correggio's not so much natural as religious and
spiritual grace, nothing more sweet than his smiling, unconscious
beauty and innocence[368].
The artistic perfection of these great masters is a culminating point
of art such as could only be mastered by one nation in the course of
historical development.
(c) Thirdly, in so far as the question is that of German painting we
may affiliate that which is entirely German with that of Flemish or
Dutch painters. The general distinction between the above schools
and that of the Italians, consists in this, that neither the Germans
nor the painters of the Netherlands were willing as a creation of
their own to attain to the free ideal forms and modes of expression
characteristic of Italian art, or were able to progress to that
spiritually transfigured type of beauty which is essentially the result
of such. What they did elaborate, however, was, in one aspect of it,
the expression of depth of emotion and the austere seclusion of the
individual soul, and, from another point of view, they attach to this
intensity of faith the separate definition of individual character in the
broader significance of it, that is to say, one which does not merely
disclose the fact of its close interest with the claims of faith and
salvation, but also shows how the individuals represented are
affected by the concerns of the world, how they are buffeted by the
cares of life, and in this severe ordeal have gained worldly wisdom,
fidelity, consistency, straightforwardness, the constancy of chivalry
and the sterling character of good citizens. Agreeably to this more
restricted and depressed vision of the detail of life we find here, and
it is particularly conspicuous in the German school, from the
beginning, in deliberate contrast with the purer forms and characters
of the Italians, rather the expression of a formal obstinacy of
stubborn natures, which either oppose themselves to God with
energetic defiance and brutal wilfulness, or are forced to impose
restraint on themselves in order that they may, with sore travail,
wrest themselves from their limitations and uncouthness, and fight
their way to the reconciliation of religion; consequently the deep
wounds which they inflict on their spiritual life inevitably contribute
to the visible expression of their piety. In illustrating this more
closely I will merely draw attention to certain prominent features,
which are important indications of the contrast between the older
Flemish school and the upper German and more recent Dutch
masters of the seventeenth century.
(α) Among the early Flemish masters, the brothers Van Eyck,
Hubert, and John are exceptionally distinguished in the early half of
the fifteenth century, and it is only recently that their true merits
have once more been established. It is now an established fact that
they discovered, or at least they were the first to fully perfect, the
process of oil-painting. Looking at the great advance they made we
must now assume that a distinct series of stages in the course of
this progress to its culmination could be set forth. We have,
however, no historical array of works of art preserved for us whereby
we could illustrate such a gradual process. We are face to face at
one moment of time with the beginning and final consummation. For
painting of greater excellence than that of these two brothers it is
almost impossible to imagine. Moreover, the works that have come
down to us, in which the mere type is already dispensed with and
overcome, not merely display a grand mastery in drawing,
arrangement, grouping, ideal and exterior characterization,
enthusiasm, clarity, harmony, and delicacy of colouring, dignity and
repose of composition; but we must add that the entire wealth of
painting respectively to nature's environment, architectonic
accessories, backgrounds, splendour and variety of material,
drapery, style of weapons, ornamentation, and much besides, is
already treated with such fidelity, with such an instinctive sense of
what is pictorial, and with such a technical virtuosity, that even later
centuries, at any rate from the point of view of thoroughness and
truth, have been unable to produce any more consummate result.
We are, however, more strongly attracted by the master works of
Italian painting, if we contrast them with this Flemish school,
because the Italians, along with the completest expression of soul-
life and the religious sense, retain throughout the ideal of spiritual
freedom and imaginative beauty. The figures of Flemish art delight
us, no doubt, by virtue of their innocence, naïveté, and piety; nay, in
the depth of their emotional life they, in some measure, surpass the
work of the most excellent Italian artists; but the Flemish masters
have never been able to attain to a beauty of form and a freedom of
soul comparable with that of the Italians. Their Christ-babes are, in
particular, badly modelled; and for the rest their characters, whether
men or women, however strongly, subject to their dominant
expression of religious fervour, they may display a sterling character
in their relation to secular interests sanctified by the depth of their
faith, nevertheless appear to us lacking in a significance which can
exalt itself over such a piety, or rather, as dominated by it, do not
appear able at the same time to be essentially free, instinct with
imagination and the enterprise of superior qualities.
(β) A further aspect we shall do well to consider is the transition
from the more tranquil, reverential piety to the representation of
martyrdoms, and, in general, what is not beautiful in reality. It is
more particularly the North German masters who excel in scenes
borrowed from the Passion in which they emphasize the savagery of
the soldiery, the evil aspects of the mocking, the fierceness of the
hate against Christ during the course of His sufferings, with
particular insistence on features of ugliness and distortion, and
which are intended to denote external forms correspondent with the
depravity of spirit. The tranquil and beautiful activity of an
unassuming personal piety is thrown into the background, and the
movements which are inseparable from the situations above
mentioned unfold us hideous distortions, expressions of ferocity, and
all the unbridled exhibition of passions. Where we have the
contending tumult and the uncouthness of characters presented with
such detail, it is not surprising that such pictures are defective in the
ideal harmony of their composition no less than their colour, so that,
more especially where a taste for old German paintings first crops
up, critics when thus confronted with what is, as a rule, an inferior
class of technical accomplishment, fall into many mistakes when
determining the date of their production. Thus it has been
maintained that they are previous to the more consummate pictures
of the Van Eyck period, although, for the most part, they hail from a
more recent time. However, the Upper German masters were not
exclusively occupied with works of this type, but have likewise
treated a variety of religious subjects, and, indeed—Albrecht Dürer,
with others, exemplifies this—even in scenes from Christ's Passion,
have understood how effectively to grapple with the extremes of
pure savagery, and even when treating such themes to preserve an
ideal nobility and an external independence[369] and freedom.
(γ) Finally, the development of German and Flemish art is
characterized in a complete identification of itself with the ordinary
life of the Present; and, along with this, in a unified system of the
most varied modes of presentation, which, both in respect to their
content and technique, are distinct from one another and
independently elaborated. We have seen already the advance made
by Italian painting from the simple nobility of devotion to an ever-
increasing assertion of secular motive, which here, however, as we
pointed out in the case of Raphael, was in some measure permeated
by ecclesiastical prepossessions, and in part limited by the coherent
principle of antique beauty. We may add that the later course of this
school is not so much a dissolution of that unity in the
representation of every kind of subject-matter under the
predominant interest of the colourist as a more superficial
disposition, or rather, eclectic imitation of styles of draughtsmanship
and painting. German and Flemish art, on the contrary, has in the
most definite and exceptional degree traversed the entire scheme of
content and modes of treatment, starting from its wholly traditional
church pictures, single figures and half lengths, then on to
thoughtful, pious, and devotional subjects, until we come to that
animation and extension of the same in larger compositions and
scenes, in which, however, the free characterization of figure, the
heightened vitality effected by means of processions, retinues,
incidental personages, embellishment of garments and utensils,
wealth of portraiture, architectural works, environment, views of
churches, cities, streams, forests, mountains, is still conceived and
executed as a whole subject to religious motivation. This focal centre
still persists; but we find that the range of subjects, which had
hitherto been held together in unity, is broken into division, and the
separate parts become, in the specific singularity and contingent
character of their alternations or independent modifications, subject
to every possible type of conception and pictorial execution[370].
In order to arrive at a full appreciation of this aspect of art's
development in the present context, for we have already referred to
the point, we will pass briefly in review the national conditions which
were operative in the change. We are under the necessity to justify,
as we shall attempt to do in the following observations, a transition
from direct relations to the Church and the outlook and pictorial
modes of piety to a delight in the world simply, that is to say, to the
objects and particular phenomena of Nature, to domestic life in its
dignity, congeniality, and peaceful seclusion, to an enjoyment of
national festivities and processions, rustic dances, the games and
follies attendant upon church fêtes. Now the Reformation had
thoroughly penetrated Holland. The Dutch had become Protestants
and overcome the despotism of the Spanish Crown and Church. And
what is more we do not, if we consider the political condition here,
either find a distinguished nobility which drives forth its princes and
tyrants, or imposes laws on them, nor yet an agricultural people,
oppressed peasantry, who break free as the Swiss have done, but
rather a population which, in by far the largest proportion of it, if we
except the few brave souls that tilled the soil and its more than
brave heroes of the sea, consisted of citizens of the town, men of
business, well-to-do burghers, men who, rejoicing in their ordinary
avocations, entertained no lofty pretensions, but, as became their
courage and intelligence, with audacious reliance in God, stood up to
defend the freedom of their hardly-won liberties and the particular
privileges of their provinces, cities, and guilds, dared to oppose
themselves to all hazards without fear of the transcendent prestige
of the Spanish dominion over half the world, to bravely let their
blood flow for such an aim, and by virtue of this righteous boldness
and endurance victoriously secured both their religious and civic
independence. And if we may brand any single condition of soul-life
as distinctively deutsch, it is just this loyal, well-to-do, and genial
citizenship, which, in a self-respect that is without pride, in a piety
which is not merely absorbed in enthusiasm and devotion, but which
is concretely pious in the affairs of the world[371] and is homely and
contented in its abundance, remains neat and clean, and in
persistent carefulness and contentment under all circumstances,
armed with its own enduring sense of independence and freedom, is
able, with loyalty to its former life, to preserve the sterling character
of its forefathers unimpaired. This intelligent and artistically
endowed people furthermore seeks its enjoyment in the pictorial
presentment of its vigorous, justly co-ordinated, satisfying, and
comfortable existence; it is all for taking a renewed delight by means
of its pictures in the cleanliness under all conditions of its towns,
houses, and domestic arrangements, of enjoying thus its household
felicity, its wealth, the generous adornment of its wives and children,
the splendour of its civic feasts, the boldness of its seamen, the
fame of its merchandise and the shipping, in which it rides over all
the seas of the world. And it is just this instinct of orderly and
cheerful existence, which the Dutch masters emphasize also in their
landscape subjects. In one word, in all their pictorial accomplishment
they succeed in combining with freedom, and truth of conception,
with their enthusiasm for what is in appearance of inferior and
momentary significance, with the freshness of open vision and the
concentration of their entire soul on all that is most stamped with
the seclusion and limitations of their life, the most ample freedom of
artistic composition, no less than the finest feeling for accessories
and the most perfect effects of studious elaboration. From one point
of view this school of painting has developed to an incomparable
degree the magic and mystery of lighting and colour[372] generally in
its scenes borrowed from war and military life, in its tavern
jollifications, in its weddings and other rustic fêtes, in its pictures of
domestic life, in its portraits, landscapes, animals, flowers, and the
rest. From another aspect it has elaborated with a similar excellence
the characterization which penetrates to the heart of life in all the
truth of which Art is capable. And although its insistence on the
insignificant and contingent includes the expression of what is
boorish, rude, and common, yet these scenes are so permeated
throughout with ingenuous lustiness and jollity, that it is not the
common in its meanness and naughtiness so much as the gaiety and
joviality which creates the artistic subject and its content. We do not
look at mean feelings and passions, but simply what is boorish, in
the sense of being rustic, near to nature, in the poorer classes, a
quality which connotes geniality, waggishness, and comedy. In short
the Ideal itself is not wholly absent from this unperturbed easy-way-
of-life. It is the Sabbath of Life, which brings all to one level and
removes all badness, simply as such. Men who are thus so whole-
heartedly of good temper can neither be wholly bad nor mean. In
this respect it is not one and the same thing, whether evil is of
purely momentary appearance in a character, or lies at its root and
essence. In the work of these Dutch painters what is humorous in a
situation cancels what is evil, and it is at once clear to us that the
characters could be something other than that in the guise of which
they are for the time being set before us[373]. A gaiety and comedy
of this description contributes much to the invaluable character of
these pictures. If pictures of this rollicking type are attempted
nowadays, the painter, as a rule, only places before us what is
essentially mean, coarse and bad without the illuminating
atmosphere of a comic situation[374]. A bad wife rails at her tipsy
husband in the tavern with all her might. In a scene of this kind we
have only put before us, as I have already remarked, the bald facts
that the man is a dissipated brute and the woman a rating wench.
If we look at the Dutch masters in this light we shall no longer
entertain the view that the art of painting should have said good-bye
to such subjects altogether, and merely confined itself to depicting
the gods of old, myths, and fables, or even Madonna pictures,
crucifixions, martyrs, popes, and saints of both sexes. What is a vital
ingredient of every work of art is inseparable also from painting, and
this is the observance of what generally concerns our humanity, the
spirit and characterization of man, in other words what man is and
what each individual is. This vital grasp of the conscious life of
human nature and the external forms of its appearance, this naive
delight and artistic freedom, this freshness and cheerfulness of
imaginative sympathy, this absolute directness of execution is what
constitutes the poetry that underlies the work of the majority of the
Dutch painters of this period. In their paintings we may study and
acquaint ourselves with human nature and mankind. Nowadays,
however, our artist only too frequently will confront us with portraits
and historical pictures, at which we have only to cast a bare glance,
and we see that, while flatly contradicting the wildest dream of what
is possible in mankind or anyone in particular, he neither knows
aught at all about man or his natural colour, nor yet the modes of
composition[375] in which we may justly express that humanity[376].

[214] Die gesammte Menschen-brust.

[215] Die in sich gediegene Individualität des Gottes.
[216] Betrachtung, here implying thought rather than vision.
[217] That is a unity which dissolves all difference.
[218] Als Inneres.
[219] Als Reflexion in sich. Probably Hegel means simply the
ultimate fact of self-conscious life—which is to find itself in Nature
as the antithesis of the synthetic unity of the ego. This is
developed in the latter half of the sentence.
[220] Lit., "Is not an essentially persistent and stereotyped
(Erstarrtes, stiffened) individual."
[221] Less than sculpture.
[222] He may mean type of art generally, but I think the
reference here is simply to painting. The passage is an important
one.
[223] I presume Hegel uses the word seeligkeit in the ordinary
sense, not "soulfulness." The close relation with Schmertz
necessitates this. But the spelling suggests the other
interpretation.
[224] Which is absent in the classical treatment.
[225] That is, the creative artist.
[226] Innerlichkeit. It is impossible to express Hegel's use of this
word by one expression. It combines intimacy, ideal union, and
inwardness of soul-life in its contrast to objective reality.
[227] That is the romantic type.
[228] Die für sich seyende Subjektivität. That is a process that
elaborates itself in independent form consonant to its own
substance.
[229] Als dieses Subjekt. That is, I assume, as the distinctive
personality of the artist. This must appear on the face of the work
as the crown of its independent type and concrete unity (Zur
Spitze des Fürsichseyns) but must not dominate it to the extent of
destroying all natural detail, not even to the extent of sculpture.
[230] Zur Spitze des Fürsichseyns. See note above.
[231] That is their union in sculpture.
[232] Als solcher. Hegel means that the universal present in
emotion is objective therein as part of the self-conscious life, but
is only presented in the concrete objective shape in the work of
the artist who therein suffers to escape the wholly personal side.
[233] Sein Inneres, his ideal substance, with more direct
reference to feeling.
[234] Aus demselben in sich hineingehend. I think what is meant
is that the material is idealized out of one of its spatial conditions
rather than that the artist selects his medium in consonance with
his temperament and technique.
[235] That is, does not affect the stability and total effect of the
work. Of course the actual effect may vary.
[236] Für diesen festen Punkt des Subjekts.
[237] Die in sich besonderte Innerlichkeit.
[238] The distinctions in matter conditioned in Space.
[239] The meaning, if rather obscurely expressed, appears to be
this. The art of sculpture shows us when it treats the spatial
dimensions as essential that we must have the entire spatial form
to do this, and it shows us that if we wish to pass from the mere
presentment of bodily form to a fuller ideal quality we must
contract this exclusive appearance of physical matter.
[240] Lit., "Begins to be subjective." Begins to possess a self-
excluding centre of unity, i.e., self-identity.
[241] That is to the point of a real subject or ego.
[242] E.g., secure an abstract result in superficies only.
[243] Apart from artistic means.
[244] Though the statements here are suggestive, they are
obviously influenced by Hegel's belief in the false theory of light
propounded by Goethe.
[245] This is a direct reference to the Newtonian theory, of
course.
[246] Zeichnung here refers to line rather than technical
excellence in draughtsmanship. It must be admitted Hegel's
emphasis of these two aspects is carried rather too far.
[247] The above passage is open to criticism. Hegel hardly makes
allowance for the fact that the defective technique, so far as it is
defective, of the earlier masters, was mainly due to their state of
knowledge. Art was, in a certain aspect of technique, in its
infancy. Moreover to compare Dutch landscape with that of Bellini
or Raphael is to compare things that are each unique of their kind
and not comparable. Their aim was entirely different. In such
pictures as the San Sisto Madonna of Raphael, the great
Crucifixion of Tintoret, or the Entombment of Titian it is quite
impossible to maintain that the earnestness of conception is in
any way inferior to the technique, although we have no doubt a
different degree of conviction expressed by Fra Angelico. And the
classical landscape of Titian or Tintoret is of its type supreme.
[248] This statement of Hegel again requires parenthesis or at
least interpretation. There is a realism such as that we find in the
most consummate work of a Titian, or the genre work of the
Dutch school, or our own Pre-Raphaelites, to say nothing of mere
academical realism, which hardly comes within his remarks. It is
obvious that the Ideal is subserved in different degrees by such
examples, and in fact to preserve that unity of conception despite
the greatest elaboration, is to serve the Ideal at least in one
aspect of it. Hegel, at least in the concluding part of this
paragraph, appears mainly to have in his mind still life and the
genre pictures of the Dutch, and rather seems to overlook his
own statement as to the necessity of selection and the power to
express detail by the shorthand of genius rather than deliberate
imitation.
[249] Grossartigkeit.
[250] Innigkeit. Intimate ideality, inwardness.
[251] I am not sure what Hegel means by the expression Nicht
das Niedrige ist zerdrückt. If the text is correct I suppose it means
the sensuous side does not make way for a more spiritual
synthesis. What we should expect is some other verb than
zerdrückt such as ausgedrückt, the sense being that "though the
mean emotion is not expressed, and no rage, etc., is asserted, yet
despite of it all," etc. I think there must be some misprint here.
[252] Ein starres Beisichseyn. Compare the expression lower
down affirmatives Fürsichseyn with which it contrasts.
[253] Für sich bestehende Herz.
[254] Als ein göttliches Moment. It means an actual phase in the
Divine existence.
[255] An important statement. Hegel's words are Sondern wir
müssen das geistige Daseyn im Bewusstseyn des Menschen als
die wesentliche geistige Existenz Gottes ansehn.
[256] A bad master at any rate for such a subject.
[257] This metaphor appears to me rather confused, and in fact I
do not pretend wholly to understand its meaning. I suppose the
idea is that beyond the clouds of soul-life there are the clouds
that obscure Providence. In all this passage Hegel shows his
limitations as an art student.
[258] Näher. That is our love of God is mainly through Christ.
[259] Ein bloss eingelnes Moment. A phase that passes or
becomes relatively insignificant.
[260] Innigste, most intimate. A curious but characteristic
conclusion of Hegel.
[261] This analysis must be accepted of course mainly as an
analysis of the ideal proposed to us by the profoundest Christian
art. It is obviously not true of much Italian art, Titian's work for
example, and it is equally remote from many of the most probable
facts of history.
[262] Die Starrheit. The rigid or unyielding character.
[263] Der Gehalt ihres Gemüths. It is possible to see in this
analysis something rather capricious and far-fetched, and yet to
appreciate its value as an analysis of Christian love for the
deceased beloved as contrasted with pagan sentiment. The finest
illustration I myself can recollect of this is not the mother Mary at
all, but the figure of the Magdalene in Tintoret's "Deposition" in
the S. Giorgio Maggiore Church in Venice. As a matter of fact the
divine mother in sacred art is almost invariably depicted in a state
of swoon under the stress of her grief, though Tintoret's Pietà in
the Brera is a notable exception.
[264] I do not know this painter. For pathos I know no finer
conception of the death than that of Rembrandt's etching. Blake's
drawing, exhibited recently at Cambridge, shows us the
tranquillity and dignity of the scene more finely than any other
representation.
[265] I presume Hegel means this by the words die Menschheit,
but it is a difficult passage.
[266] It is impossible in English to preserve the antithesis
between bitten and beten.
[267] Und nichts für sich hat. That is to say reciprocity is of its
essence. "Give and it shall be given unto you."
[268] Die Gestalt may possibly refer to the suppliant.
[269] The Sistine Madonna.
[270] A good instance is the great Crucifixion of Fra Angelico in
the S. Mark convent in Florence.
[271] And a painter like Carlo Dolci or the Caracci are even worse.
[272] It would perhaps have been more instructive to consider
the difference of temperament in the artist when dealing with
such subjects and its influence on his treatment. It is very far
from an obvious truth that physiognomy upon which the conflict
of soul-life is most marked loses thereby the characteristics of
beauty. There is the beauty of gnarled oak no less than that of
the rose and the lily.
[273] Das Beisichseyn der Liebe im Absoluten. Lit., the self-
inherency cf Love within the Absolute.
[274] Sondern auch selbständig. He seems to mean that they
receive from this relation the subsistent individuality of spirit. This
reference to landscape is obviously very perfunctory and
insufficient.
[275] See vol. I, p. 220.
[276] Mit dem in sich particularisirten Innern. With the ideal
complexus of particular objects as related to one subject. Their
particularity is due to their characterization, and that is dependent
on idealization.
[277] Diess Verwachsenseyn. Lit., this growing up with.
[278] There is, however, the aspect of consummate execution
which in itself is a very real source of artistic enjoyment, and
Hegel rather seems to overlook this here.
[279] Verzweigungen. All off-shoots of attention or interest.
[280] Of course, even in the painting of still life, artistic
composition itself implies by its selection and subordination to an
idea a new result. And the characteristic technique of a painter
inevitably has the same result.
[281] Geistigen Ausdrück.
[282] Grundlage.
[283] It is perhaps rather strange that Hegel should have
considered the Dutch and Flemish schools as pre-eminently
colourists. Apart from Rembrandt the truth is not very apparent.
But he was mainly thinking of their dexterity in the lighting of a
picture and the scintillation of colour.
[284] That is, as black and white and its gradations.
[285] It is not quite clear what is intended here by
Vervielfältigung, probably power of being adapted to various
subject matter and modes of expression.
[286] It is hardly necessary to point out that this discussion, being
based on Goethe's false theory of colour in opposition to Newton's
prismatic analysis, has no scientific value, though historically of
interest. The blueness of the sky is due to the blue rays being
detained.
[287] I presume by concrete unity Hegel refers in some form to a
unity that is such owing to its intrinsic nature.
[288] But red quite as often symbolizes enthusiasm and love, and
in Tintoret's Paradise the Virgin has the red tunic and the blue
mantle.
[289] As a matter of fact violet or purple is a cardinal colour.
[290] Green is not a cardinal colour.
[291] Hegel seems to have in view the Flemish school rather than
the Dutch in the restricted sense. It is rather strange that he
should dwell on this rather than work of the Venetians such as
Bellini.
[292] Verschwemmte. Carried away by a stream.
[293] Such as Ary Scheffer and others of the same monotony.
The flesh tints of Leighton and Poynter and many less men suffer
in the same way.
[294] Farbenschein, as Hegel uses it later on, I find it impossible
to translate in one word. In fact it is not easy to seize precisely
what he means. "Modulation of colour" partly expresses it. But he
also seems to refer to what we understand as the personal quality
of a picture or its general atmosphere, not regarded simply as
Nature's atmosphere, but as the communication of the artist's
own afflatus.
[295] I crossed a young landscape-artist of growing fame the
other day, who affirmed and endeavoured to express in his
pictures the conviction that colour was as strong in distance as
foreground. His pictures were of great interest, but I still think his
robust theory unsound.
[296] We have no English equivalent for the German das Incarnat
or colour incarnate.
[297] Ein ideelles Ineinander. By ideal Hegel means apparently
that the distinctions of tint fine away beyond the grasp of sense
vision. This of course is true in all natural colouring. Possibly he
may mean that the idea of Life is contributive to the result.
[298] Hardly a just simile for the reason that, as Hegel himself
points out, flesh does not reflect external objects.
[299] Den Schein innerer Belebung. This expression seems to
prove that Hegel uses the word ideel in its ordinary sense of
spiritual ideality.
[300] Als selbst lebendiges Ganze. The colour must appear as
itself a part of the vitality, not a mere covering.
[301] Vertreibung. What Hegel exactly means I am not sure,
probably finish by over-paintings.
[302] Fresco painting is strictly in tempera. I suppose Hegel has
here before him the two processes of tempera painting on the
wet wall of plaster and tempera painting on some other dry
surface.
[303] Zu grosser innerer Klarheit und schönen Leuchten. I give
what appears to me to be the meaning.
[304] I presume Hegel understands by Deck und Lasurfarben the
distinction of our opaque and transparent colours such as flake
white and the madders or umbers. He clearly refers to glazes.
[305] Die Duftigkeit, Magie in der Wirkung des Kolorits. This is a
difficult passage to translate, and I am not quite sure what Hegel
is aiming at. He seems to have in his mind both the ideal
atmosphere of a composition and the presence of a personal
style.
[306] Hegel has already related the effects considered to the
artist's personality. He now endeavours to examine more closely
what is implied in the relation.
[307] Adriaen van Ostade, 1610-1685.
[308] He means painting, of course. He never passed beyond the
stage of the average amateur.
[309] Spiel von Scheinen. The play of appearance, that is, as it
strikes on different natures.
[310] Malerischen Auffassung. Here the ideas on mental
conception and artistic composition seem to be combined. But
Hegel is rather loose in his use of them.
[311] Hegel has doubtless Albrecht Dürer and yet earlier German
art in his mind.
[312] Die besonderen Bestimmungen. The lines of its definite
exposition.
[313] I adopt Hegel's generic term. But he means here little more
than delineation or composition.
[314] As between the art of painting and those of poetry and
music.
[315] Geistig. We may say the same thing of Tintoret's great
Golden Calf picture. But the objection to the composition as a
work of art remains more strongly than is the case with Raphael's
picture.
[316] The same thing is a characteristic of Tintoret's Annunciation
in the S. Rocco Scuola and several pictures of Dürer.
[317] Fine examples of this are Rembrandt's Descent from the
Cross in the Munich Gallery, and the group of mourners in
Tintoret's Great Crucifixion.
[318] They have in this respect been well contrasted with the
characters of Euripides in the play of Aristophanes which
particularly emphasizes the difference between the heroic type of
Aeschylus and the realism of Euripides, "The Frogs of
Aristophanes," text and translation of B. B. Rogers; see Introd.,
pp. XVIII, XIX, XLV.
[319] As to ugliness and its treatment by Hegel, see Professor
Bosanquet's "History of Aesthetik," pp. 338, 355, and generally
pp. 432-436.
[320] That is sculpture. Hegel calls it im Plastischen.
[321] An ideal with Hegel is not necessarily an image of the mind,
but far more generally the concrete realization of life.
[322] He should have added Tintoretto at least. What could be
more pertinent than his Sages in the Palazzo Reale in Venice.
[323] Applies to the study rather than the talent exercised.
[324] Aber ganze Grundbild des Charakters darstellen.
[325] Den geistigen Sinn und Charakter. He means the entire
spiritual impression, heart, soul, and intelligence, with its practical
effect in substantive character.
[326] I think this is implied here in Hegel's use of the words
verarbeitet durch den Geist. But it may mean "in the face as
worked upon the soul within the person portrayed."
[327] Die wahrhaften absoluten Momente für die Characteristik.
[328] The German expression is, "It is not a serious affair with
her sinning." I am not sure that Hegel's view here does not lean
towards the sentimentalism he generally so strongly opposes. No
doubt a clear conception of the Magdalene's character is difficult.
But it is obvious that the less stress we lay upon her sin, the less
weight her conversion carries from the religious point of view, and
the less great appears the effect of the interposition of her divine
Master. Correggio was not a master likely to penetrate profoundly
into his subject. But, on the other hand, it must be admitted that
Hegel's contention is in one aspect of it supported by the far finer
conceptions of the Magdalene in Tintoret's work. At least this
great master clearly shows us that in his view of her she was
strongly emotional, heart and soul in everything whether for
good, under good influence, or for evil under opposite direction. It
is possible to understand Hegel's interpretation as one mainly
aesthetic.
[329] In Berlin. The statement is made in February 1829.
[330] The omission of the Spanish school at least omits a most
important link with modern impressionism and its close relation to
that transition to music. And it is impossible to indicate the
progress of landscape without reference to the English school.
[331] "Ital. Forsch.," vol. I, p. 279.
[332] The words in ähnlicher Weise make no sense.
[333] "Ital. Forsch.," vol. I, p. 280.
[334] Literally the sense is "Which (apparently agrees with the
trait of piety) invigorates with soul that assuredness and accepted
fact (Fertigkeit) of existence, which is from the very first (von
Hause aus) more decisive (entscheidenere) in this province of
salvation (des Heils)." Heils must obviously be used in the same
sense as Heiland above. My translation is necessarily rather free,
but I hope I have emphasized the meaning.
[335] Ein ideal bleibender Uebergang. The transition is rather one
the soul imagines than an actual fact. "Ideal persistence" is
perhaps better.
[336] Religiosität here used in good sense.
[337] Lit., "More free from struggling." Compare Saint John and
Saint Paul as examples on the higher levels.
[338] That is Italian painting.
[339] Hegel's delight in Italian opera is well known to readers of
his correspondence. In the above fine passage he to some extent
unbelts himself from his ordinary tone of rather austere reticence.
[340] The distinction seems to be between the more formal unity
of personality and the peculiarly seductive charm of Italian art. It
is rather a fine one and it seems to me rather confusing.
Moreover I do not quite see the pertinency of the simile of a
Psyche that is wafted as a butterfly even round blooms that have
been spoiled of their treasure, for such I understand to be the
sense of verkümmerte Blumen. A butterfly comes into no active
relation with such unless the idea is pictorial decoration. But
possibly Hegel was thinking of his reference to Dante, and in that
case employed the metaphor loosely, rather too loosely I should
say.
[341] "Stunted" is perhaps the best translation. The fault of the
simile lies in its superficiality. It does not penetrate the conception
Hegel has before him.
[342] Giotto, Mantegna, Carpaccio, Masaccio, would be leading
names in point here. Hegel mentions two himself lower down.
[343] "Ital. Forsch.," vol. II, p. 4.
[344] Grelle. That is harsh and flagrant outline.
[345] Ihrer must refer I think to the Italians, though the sentence
might mean, "In contrast to these Greek productions."
[346] Als Ueberzug. The expression suggests it was used as a
facial glaze or varnish.
[347] "Ital. Forsch.," vol. I, p. 312.
[348] That is mixed with the attrited colour in its dryness.
[349] Leimen. Leim is size or lime, in the compound word leim-
farbe signifying distemper.
[350] "Ital. Forsch.," vol. II, p. 42.
[351] Decam. Giorn., 6. Nov. 5.
[352] Such as S. Francis as presented us in Giotto's great frescoes
in Assisi.
[353] No doubt the serious aspect is less imposingly emphasized;
but if the opinion condemned below is too sweeping it remains
the fact that we can imagine nothing more profoundly serious in
the religious sense than the frescoes in the Arena Chapel in
Padua.
[354] "Ital. Forsch.," vol. II, p. 73.
[355] "Ital. Forsch.," vol. II, p. 213.
[356] Aufgaben, artistic problems, themes.
[357] "Ital. Forsch.," vol. II, p. 243.
[358] This of course is too strong a statement, and indeed is
ridiculous to anyone who has complete knowledge of the best
work even of Giotto.
[359] "Ital. Forsch.," vol. II, p. 252.
[360] The frescoes of Mantegna, and those of Ghirlandaio, we
would mention in particular the fine examples in the S. Maria
Novella church in Florence, or for Mantegna our own cartoons at
Hampton Court and the invaluable but now hopelessly ruined
frescoes of Gozzoli, in the Campo Santo of Pisa, are fine
illustrations of the text.
[361] Des inneren Geistes may here refer to the ideal aspects of
civil and domestic life, but I think Hegel is contrasting the two
extremes and it refers to the religious content.
[362] "Ital. Forsch.," vol. II, p. 282.
[363] To make this judgment in any degree a sound one we must
assume the stress is laid on the mysterious aspect of expression
and form. The genuine examples of Leonardo are so very few. But
quite apart from that unless we exclude the great triumvirate of
the Venetian school altogether Tintoret, Titian, and Veronese, the
praise here given to Leonardo as a consummate master of the
technique in oil-painting can only be received with considerable
reserve and qualification.
[364] Compare "Ital. Forsch.," vol. II, p. 308.
[365] Die reinste Vollendung. The adjective refers to the character
of the perfection as an expression of artistic feeling and
execution.
[366] Halbdeutliche Erinnerungen. Not I think memories that are
obscure themselves so much as memories which have failed to
grasp the content of what is recollected. The expression is rather
confused.
[367] Modern criticism would doubtless have a good deal to say in
qualification of this. The name of Bellini alone is sufficiently
suggestive.
[368] This emphasis on the work of Raphael and Correggio is
characteristic of the best art criticism of the times of Hegel, but
marks its limitations. Neither Raphael nor Correggio can be called
religious painters in the sense that those profound masters
Tintoret and Michelangelo were such. The essentially academic
aspect of so much of Raphael's later production is not noticed.
And it is these three great names, Titian, Tintoret, and
Michelangelo, who most truly mark the transition to our modern
outlook.
[369] Eine aüssere Abgeschlossenheit. This must mean, I think, a
dignified and reserved treatment of the technique mainly of such
themes.
[370] The technical and somewhat long-worded aspect of Hegel's
style is here at its worst and I find it hard to make complete
sense of this doubtless unrevised passage. The main difficulty is
this, that the sentence appears to assert that "the centre" (der
Mittelpunkt) of religion persists (fortbleibt) and yet asserts in the
same breath that the informing unity is broken up. I have done
my best.
[371] A piety which is not merely emotional, but is concrete in
active life, possesses practical content.
[372] See note at end of chapter.
[373] This appears rather to contradict what Hegel has said
before of the impression a fine picture such as Correggio's
Magdalene leaves upon us that we cannot imagine the character
to be other than it is. See note below.
[374] More literally, "Without the alleviating effect of what is
comic."
[375] I presume die Formen refers here rather to the artistic
forms of grouping and composition than the traits of vital
expression. But perhaps the latter interpretation would be more
natural to the words.
 [376] The above survey of Dutch art is of great interest, and in its
careful comparison of the type of that art with the national
development of the Dutch may be contrasted favourably with the
somewhat prejudiced criticism of such a critic as John Ruskin. At
the same time I think it must be obvious that Hegel is a little
inclined to overrate the ideal aspect of that portion of it we may
indicate in the work of painters such as Wouvermans or Teniers,
many examples of which are little removed from the defects of
theme he points out in more modern work. Also personally I
should say that, if we exclude the supreme genius of Rembrandt,
he rather exaggerates their rank as supreme colourists in respect
to the scintillation, mystery, and other effects of light. To consider
that they rank above the Venetians in this respect is wholly
impossible, to say nothing of Velasquez. Rubens, however, may
add some support to the view, but he is hardly in the school
described, and Van Dyck stands with him.

CHAPTER II

MUSIC

INTRODUCTION

If we glance back at the course the evolution of the several arts has
taken, we shall find that it began with architecture. It was the art
which was least complete; for, as we discovered, it was, by reason of
the purely solid material, which it attached to itself as its sensuous
medium, and made use of according to the laws of gravity, incapable
of placing before us under an adequate mode of presentation what
is spiritual; it was consequently constrained to limit itself to the task
of preparing from the resources of the mind an artistic external
environment for Spirit in its living and actual existence.
Sculpture, on the contrary, and in the second place, was able, it is
true, to accept the spiritual itself as its object. It was, however,
neither one in the sense of a particular character, nor as the intimate
personal life of soul, but rather as a free individuality, which is as
little separate from the substantive content as it is from the
corporeal appearance of Spirit; a presentment which only displays
itself as such individuality, in so far as the same enters into it, in the
degree that the same is actually required to import an individual
vitality into a content which is itself intrinsically essential. Moreover,
it only, as such ideal spiritualization, is fused with the bodily
configuration to the extent of revealing the essentially inviolable
union of Spirit with that natural embodiment which is consonant
therewith. This necessary identity in the art of sculpture of Spirit's
independent existence wholly with its corporeal organization, rather
than with the medium of its own ideal essence, makes it incumbent
upon the art still to retain solid matter as its material, but to
transform the configuration of the same, not, as was the case with
architecture, into a purely inorganic environment, but rather into the
classical beauty adequate to Spirit and its ideal plastic realization.
And just as sculpture in this respect proved itself to be pre-eminently
fitted to give vitality to the content and mode of expression of the
classical type of art in its products, while architecture, despite all the
service it rendered in the content which belonged to it, was unable
in its manner of presentation to pass beyond the fundamental mode
of a purely symbolical significance, so, too, thirdly, with the art of
painting, we enter the province of the romantic. No doubt we find
still in painting that the external form is the means by virtue of
which the ideal presence is revealed. In this case, however, this
ideality is actually the ideal and particular subjectivity, is, in short,
the soul-life returning upon itself from its corporeal existence, is the
individual passion and emotion of character and heart, which are no
longer exclusively delivered in the external form, but mirror in the
same the very ideal substance and activity of Spirit in the domain of
its own conditions, aims, and actions. On account of this intimate
ideality of its content the art of painting is unable to rest satisfied
with a material that, in one aspect of it, is in its shape merely solid
matter, and in another as such crude form is merely tangible and
unparticularized, but is forced to select exclusively the show and
colour semblance of the same as its sensuous means of expression.
The colour, however, is only present in order to make still apparent
spatial forms and shapes as we find them in the actuality of Life,
even in the case where we see the art developed into all the magic
of colouring, in which the objective fact at the same time already
begins to vanish away, and the effect is produced by what appears
to be no longer anything material at all. However much, therefore,
painting is evolved in the direction of a more ideal independence of
a kind of appearance which is no longer attached to shape as such,
but is permitted to pass spontaneously into its own proper element,
that is, into the play of visibility and reflection, into all the mysteries
of chiaroscuro, yet this magic of colour is still throughout of a spatial
mode, it is an appearance growing out of juxtaposition on a flat
surface, and consequently a consubsistent one.
1. If, however, this ideal essence, as is already the case under the
principle of painting, asserts itself in fact as subjective soul-life, in
that case the truly adequate medium cannot remain of a type which
possesses independent subsistency. And for this reason we get a
mode of expression and communication, in the sensuous material of
which we do not find objectivity disclosed as spatial configuration, in
order that it may have consistency therein. We require a material
which is without such stability in its relation to what is outside it, and
which vanishes again in the very moment of its origin and presence.
Now the art that finally annihilates not merely one form of spatial
dimension, but the conditions of Space entirely, which is completely
withdrawn into the ideality of soul-life, both in its aspect of
conscious life and in that of its external expression, is our second
romantic art—Music. In this respect it constitutes the genuine centre
of that kind of presentment which accepts the inner personal life as
such, both for its content and form. It no doubt manifests as art this
inner life, but in this very objectification retains its subjective
character. In other words it does not, as plastic art, suffer the
expression in which it is self-enclosed to be independently free or to
attain an essentially tranquil self-subsistency, but cancels the same
as objectivity, and will not suffer externality to secure for itself an
inviolable presence[377] over against it.
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