First of all Paul Senior, let me say at the outset, that when I make a comment via a post on this Board, or any other Board for that matter, it's an expression of my opinion about a particular topic or aspect. Whether or not you, or anyone else, wishes, for example, to utilise a Price/Book ratio in your stock analysis, then that is entirely up to you. I'm perfectly aware that it's none of my business what you or anyone else wishes to do in that regard.
However, I'd like to think that one should at least be permitted to express an opinion and put forward an argument for, or against, a topic or observation. In like manner, if anyone should disagree with my opinion or observation then that's fine. I'm more than happy and prepared to debate an issue in a constructive and "non-aggressive" manner.
Now, ... to reply to your reply ... In previous correspondence with you I stated that I have no criticism or problem with the principle of Book Value, of itself. What I commented on was the use of the Price/Book ratio where a comparison is made with the Price of a stock compared to the BOOK VALUE PER SHARE of that stock and the often held conclusion that if the Stock's price is lower than the Book Value per share then one is likely to be buying a "bargain" or obtaining an investment of "greater value".
Personally I cannot see how shareholders can benefit from buying a share below book value per share other than if they held that share at the time the company was liquidated and they obtained a payout per share larger than the price they originally paid for that share.
In addition one also has to bear in mind that the book value of a company as stated in its Balance Sheet may not be the financial amount that the shareholders obtain at liquidation time.
You stated, ... " Hasn't he said it's by growth in book value of the stock?".
Yes, I'm sure he did say something of the kind. And as I also mentioned to you in a previous correspondence, we have, in broad terms, Book Value as being the difference between Total Assets and Total Liabilities (and, Yes, that can be refined to take Intangible Assets into account, etc...).
And that is one side of the Balance Sheet equation. On the other side we have, in broad terms, Share Capital + Retained Income. So if Share Capital remains constant, i.e. no new shares are issued, then it's the 'Retained Income' number that will affect Book Value, bearing in mind the mathematical properties of an equation.
And as we know, the 'Retained Income' originates in the Income Statement. And that is why, IMO, Buffett puts a lot of emphasis on the contents of that particular Financial Statement and why he has put together several pertinent financial ratios, with target percentages, in order to see how well a company is doing in terms of how much of its Top Line Revenue finds its way down to its Bottom Line, i.e. Net Income. Because the more that gets there, the greater will be the Retained Income contribution to the Balance Sheet and hence the enhancement of its Book Value.
You also stated, ... "That would be a high p/bk, relative to where the stock has traded in the past ten years"
Well, IMO, if one wanted to look at the past history of a price ratio I would suggest one could possibly do better by looking at the past ten year's history of the P/E ratio. At least the "E" is a far more exact, unambiguous and reliable number, which can clearly be obtained from the Bottom Line, compared to the book value per share which may not, in fact, be a "reliable" number, especially at liquidation time.
And when it comes time for Buffett to determine when it's best to buy, or sell, shares, I'd say that he utilises his "Equity Bond" criteria which is based on factors such as a company's TTM Pre-tax Earnings and the Long Term Corporate Bond Rate (preferably, I believe, the 10 year AAA Corporate Bond rate) which one can find at ...
finance.yahoo.com
I put together a summary of what I found regarding his Equity Bond, contained in "Warren Buffett and the Interpretation of Financial Statements", in my Board's header ....
Message 26421355
I found no reference to Buffett using any form of "p/bk" in the writings of David Clark who, according to his co-author, Mary Buffett, is one of the most successful 'Buffettologists' and is an internationally recognized authority on Buffett's investing 'modus operandi'.
I can't say that I've seen his reference to "p/bk is 1.2x". Maybe you can point me in that direction. |
