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

To: Alejandro who wrote (3731)	4/2/1998 10:48:00 AM
From: Ron Bower	Respond to of 78985

Ali, James can give you more educated answer, but I look for certain things when considering BV. Overstated - they have made an acquisition and are carrying the acquired company on the books at the price they paid for it. One must determine if they overpaid or underpaid. I usually deduct 'goodwill' from assets to determine BV because it's the amount they paid over and above the BV of the company they acquired. Sometimes I leave it on because it was a very good acquisition (bought out a competitor). Also - they are carrying R&D as an asset, carrying L&B at a high value and it may be worthless, have large EPA or other liabilities that aren't on the books, have litigation that they are likely to lose, they have debt secured by stock, warrants, options, etc. There are many things that can cause the BV to be overstated and it's sometimes necessary to look deep to determine what they are. Understated - They have purchased equipment and are using a fast depreciation schedule (Deswell), have made a good buy of another company and have put it on their books at BV, taking a writeoff on the amount overpaid, they have extensive R&D that they have written off but the patents are valuable, L&B purchased years ago and has become very valuable (St Joe), etc. One doesn't find any of this in a stock screening. I look at BV to analyze management and I consider management to be the most critical aspect of investing. For what it's worth, Ron

To: Alejandro who wrote (3731)	4/2/1998 12:43:00 PM
From: Chuzzlewit	Respond to of 78985

Ali, book value is always historic (with the exception of assets acquired as the result of purchasing another company), and that's one problem. A second problem is that depreciation is an estimate based on an estimated salvage value and estimated useful life. A third problem is that securities are not marked to market. A fourth problem is the fact that BV depends on such things as inventory accounting conventions (LIFO vs. FIFO), estimates for bad debt, knowledge of how the company recognizes a sale, etc. etc. While some fixed assets like land may appreciate over time (and thus the underlying BV is understated), others assets like hi-tech equipment decrease in value very rapidly due to obsolescence. I guess what I'm trying to say is that in order to accurately adjust book value to reflect market conditions requires an audit. Regards, Paul

To: Alejandro who wrote (3731)	4/2/1998 11:33:00 PM
From: James Clarke	Read Replies (2) \| Respond to of 78985

Book value. Very very difficult topic. If it were so easy that you could just invest in low p/b stocks and make a fortune, the market would quickly figure that out and it wouldn't work any more. Forget the screens - you've got to THINK. When you look at a low price/book stock, put the balance sheet in front of you. Ask yourself, what are each of these items really worth. Cash - thats worth the number on the balance sheet. Inventories, fixed assets - those you really have to do some homework on. Goodwill? You've really got to be careful. Investing is not so easy that there is some magic formula. If you don't understand the business and don't understand what those numbers on the balance sheet really are (I'm not talking accounting - I'm talking receivables - receivable from whom? inventories - what are they and what are they really worth? factories - when were they built? are they worth anything to anybody else?) Why didn't I talk about the liability side of the balance sheet. Buffett said (paraphrased) "The liabilities are always real"