p/bk. I will try one more time to explain to you why I use p/bk as a criterion (one criterion) for buying a stock.
Let us consider Beloved Buffet and Berkshire H. How has Mr. Buffet asked us to evaluate his porformance as chairman? Hasn't he said it's by growth in book value of the stock?
We know stocks fluctuate a lot. A lot more than book value. Which means p/bk fluctuates. If one looks at the history of a Berkshire, we see that its yearly p/bk avg has varied between 1.2 and 1.8x over the past ten years. Meanwhile its stated bk has moved from $58k to $152K. When is it a good time to buy Berkshire?
Perhaps anytime based on past ten years, because bk has increased so well during that period, that's what Mr. Buffet clues us to look at, and maybe bk growth is likely to continue.
But what if BRK p/bk is selling now at 1.9x. That would be a high p/bk, relative to where the stock has traded in the past ten years. Maybe something's changed to make the stock more valuable in the eyes of investors (who've bid up the price). Maybe, as you seem to say, the company's worth really has not much if any relevance to book value for this, an on-going concern.
But maybe, if the p/bk has been lower over the past ten years, then maybe one might consider waiting for investor perceptions/desires/wants to change to where the stock drops back to closer to its ten year or five year average (which is 1.3). What might be some presumptions with this approach? One: the business of BRK hasn't changed much in the past five years or so. Two: with some patience we will see the stock trade in its normal range. Three: If the stock does fall to 1.3x stated bv, and one does decide to buy, maybe the stock will be purchased at a higher price than currently (assuming BRK now trades at 1.9 p/bk). This would be because bk keeps increasing every year. Four: this approach presumes that over ten years the totality of all investor/speculators/analysts who've looked at this company have traded the stock such that they're not willing to bid the stock up over 1.8x bk on average, nor sell into the stock when it has fallen to 1.2x stated bv.
Isn't that what Mr. Buffet has said or implied when he's been asked when he might buy back shares? When the p/bk is 1.2x -- wasn't that his answer or some p/bk number close to that?
And when the price/bk did get to a multi-year low of 1.2 in 2009, several people here did buy. And recently with bk still growing and the p/bk at 1.3 -- a least a couple of us believed that's close enough such that we have recently bought or added to positions.
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Ok. we're talking about a major insurance company, so analysts like book value. But it can be similar for other companies too, especially if other criteria are employed in conjunction, like p/sales, p/earnings, p/cash flow. |
