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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (56488)	12/31/2015 3:22:22 PM
From: bruwin	Read Replies (2) \| Respond to of 78748

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.

To: Paul Senior who wrote (56488)	12/31/2015 7:05:59 PM
From: Graham Osborn	1 Recommendation Recommended By E_K_S Read Replies (1) \| Respond to of 78748

Just a couple more thoughts.. like all ratios the P/ b should depend on the growth rate of the denominator. Mergermania has made this tricky since goodwill on balance sheets is being used to conceal negative tangible book. Smart acquisitions don't erode tbook over the long term. Noteworthy exceptions to stupid acquisition syndrome are stalwarts like WMT, BRK, GOOG. That's why I use tangible book. I will even forgive apparently poor operating metrics or apparently poor cash flow in certain cases if consistent growth in tbook implies a different story. That's also why 10-year samples may be biased since accounting conventions tend to be reflexive. But that is often the most data you can pull and I do use it (08-09 mostly).

To: Paul Senior who wrote (56488)	1/9/2016 3:23:14 PM
From: bruwin	Read Replies (3) \| Respond to of 78748

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 ... ----------------------------------------- "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?" ---------------------------------------- ... 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.