Why Investors Ought to Use Book Value When Considering Which Company to Buy

For an investor just starting out, seeing the massive number of investable companies out there can seem daunting. Finding a place to start, or some sort of strategy to employ, to narrow down such a list of a manageable one, is certainly a prudent idea.

In this article, I’m going to discuss an old-fashioned, but time-tested and true, strategy for young investors to do just that, and cut through the noise.

While many investing strategies today take the form of momentum, growth, or other high-risk methodologies, for conservative long-term investors, going back to fundamentals and looking at key ratios such as price to book value, is a timeless way to assess stocks over long periods of time.

By comparing a company’s valuation (its stock price) to its intrinsic asset value (or book value, a “sum of the parts” look), a very simple ratio emerges which tells the average investor a lot of information. That said, I would not recommend using price-to-book as a key metric for certain sectors lacking durable assets or highly reliant on intangible assets, but rather looking across specific “hard” sectors such as utilities, retail, mining, energy, hardware, etc.

By comparing one company to a group of its peers (either directly or against a peer group average), one will be able to garner a pretty good idea as to how richly or inexpensively the market is valuing said company, compared to others.

Having a general idea as to whether a company could be considered overvalued or undervalued is very useful related to an investor’s perception of market timing -- buying companies when they’ve been beaten up, and holding for long periods of time or selling when the price the market is demanding is simply too dear is a time-tested way of building wealth over long periods of time.

Invest wisely, my friends.