A while back we exchanged a post or two regarding p/bk ratios.
You mentioned several ratios related to Berkshire Hathaway, especially when to buy or sell its stock ...
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"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?
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.
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?"
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... I put the following composite together (PRICE in 'green', BOOK VALUE PER SHARE in 'blue', P/B in 'red') to see whether one could pick up any "signals" from any particular p/bk ratio ...
If we look at the end result of the structure of the 'P/B' ratio (Red) for BRK.A, its 'shape', as we see it superimposed on the Price graph (Green), is virtually the same as PRICE.
In the case of BRK.A I'd say that's probably not surprising because the calculation of P/B arises from dividing Price by Book Value per share. And the graph of Book Value per share is a fairly straight line at a fairly constant gradient. Therefore the P/B graph should follow the Price graph reasonably closely as there is very little in the way of the 'deviation' of the Book Value per share 'denominator' in the calculation of P/B.
Therefore, if the P/B graph follows the shape of the Price graph then should there be any significance in any P/B ratio, as it will mirror price ?
On the other hand, Book Value on its own (Blue), which is heavily influenced by the Bottom Line of the Income Statement contributing to 'Retained Income', shows a positive steady upward climb.
I guess that's not surprising for a company of the calibre of Berkshire Hathaway with its healthy income stream.
So if one tracked Berkshire's Book Value, on its own, and took action after any decline or fall off reversal, as one saw in about 2009 and 2012, then one would have got into its stock where there was a potentially longer term upward move in its share price, very likely based on the improvement of its financial fundamentals which would be reflected in its Balance Sheet from input from its Net Income. |
