Book Value and Value Investing are terms you hear all of the time out there in the investment world. Where do they come from and how are successful people using them is always a question of interest?
We here at Parnassah Investments (PI) use things like book value as one resource for evaluating stocks. One word of caution though is not to rely on book value alone. Over the years I’ve watched many stocks “Book Value” erode away. What I’ve found here is a very good article on how book value is used to look at companies in strong sectors. Don’t take this and chase the latest and greatest high flying gold stock, because you will get burned.
Below is a great article I came across taking about just this.
What to Do Now? How About Some Wisdom From the Past!Some of you are still wondering what to do now that the market has crashed and has started a rebound. Hopefully this is not a temporary rebound as many think it is. Have you ever wondered what the "Wise Old Men" of investing are doing? Smart Money Magazine interviewed investment gurus who had been around for several recessions and got their take on the kinds of stocks to buy. They like solid stocks of companies with good businesses. Stocks like Comcast (CMSCA), Williams COS. (WMB), NV Energy (NVE), or Mitsubishi Corp. (MSBHY), Dell (DELL). Read on for the advice of these long term survivors in the market.
In the mid-1980s, when she was a business student at Dartmouth , Sarah Ketterer enjoyed reading books from the 1930s about how to value stocks. How neat, she thought, to analyze a business based on its “net current asset value,” the amount of money a firm would fetch when it was liquidated. But by the time Ketterer was investing professionally, using that and similar metrics was about as popular as disco or bell-bottom jeans.
Only now Ketterer is embracing those decades-old formulas, not just for nostalgia but also because they’re back in style – and turning up more high-quality stocks than they have in years. In fact, Causeway Capital Management, the $9 billion asset-management firm she leads, recently bought Dell and Disney after applying those strategies. These days, Ketterer says, the old-school approaches are identifying “not crummy businesses but really good ones.”
Who would have thought that a Depression-era investing style could be in vogue in 2009? But a growing group of investors are digging out their old textbooks and taking refresher courses in valuing companies based on margin of safety, current asset value and a slew of other concepts perfected 75 years ago. The market’s 16-month slide, while devastating to many people’s net worth, has created the types of bargains that drew many pros to investing in the first place—good businesses that can survive the crisis but are trading as if they’re dead. “They are so cheap, you can be wrong and still be okay,” says long-time value investor Wally Weitz, manager of the Omaha-based Weitz Funds. These strategies made millionaires out of some of their disciples coming out of the Depression, and some investing pros think history will repeat itself.
These retro ideas are mostly attributed to legendary investor Benjamin Graham. After taking a beating in the 1929 stock market crash and again in 1932, Graham wanted to tweak his investing style to make money over the long run while taking a lot less risk. Graham, with the help of coauthor David Dodd, wrote down their principles in the 1934 book Security Analysis, a tome now considered a stock-picking bible by man investors, including Warren Buffett, who studied under Graham. The duo’s theories boil down to a simple goal: An investor should aim to buy $1 worth of company for a lot less than $1.
However, by the1980s, looking for stocks that traded for less than “book value,” or the value of the firm’s assets, seemed, well, old-fashioned. Few U.S stocks were valued as cheaply as the ones Graham found back in the 1930s. And by the time Ketterer began her investing career in 1990, most of the American firms the techniques would identify were terrible businesses.
But some pros say the stock market wipeout has indiscriminately crushed companies of all kinds, and they are finding more Graham-esque stocks than at any time since the 1970s. Sure, 21st-century investors have applied some tweaks to the old theories, but high-quality businesses such as Comcast are now trading at below book value, a staple metric of old-fashioned value investing. “That gives you courage when you are looking at some wormy type of situations,” says John Spears, co-manager of the Tweedy, Browne Value fund.
To be sure, many investors, including Buffett, have been tripped up by this perplexing market. Last fall and winter, seemingly underpriced stocks fell even further; since then, the ups and downs of bear-market rallies have made it even harder to judge stocks’ values. But for the first time in decades, Graham-style investing is turning up some great companies that could also be great long-term investments.
Smart Money
May, 2009
PP. 82-84
For a great summary analysis of these companies surf over to the following site and read the articles: http://www.smartmoney.com/investing/stocks/Back-to-The-Future-Investing/
