Book Value vs. Market Value
Book Value vs. Market Value
DISCLOSURE: THIS POST MAY CONTAIN AFFILIATE LINKS, MEANING I GET A COMMISSION IF YOU DECIDE TO MAKE A PURCHASE THROUGH MY LINKS, AT NO COST TO YOU. PLEASE READ MY DISCLOSURE FOR MORE INFO.
"Nowadays, people know the price of everything and the value of nothing." - Oscar Wilde
And that is especially true for stocks. How can an investor determine the appropriate price to pay then?
There are at least +10 ways. Today, we’ll dive deep into one of them – book value.
Many well-known investors, like Warren Buffett, made money by buying stocks priced lower than their book values.
It’s time for you to make some money too.
The “Price Tag Paradox”
Let me ask you something. How much is a share of Apple worth to you? $100?... $200? It doesn’t matter.
You’ll have to pay the market price, determined by the value that the Market places on the stock.
The price of all stocks is determined by what people are willing to pay for a company's stock.
So, you can imagine the number of influential factors that impact it. Panic, greed, earnings, scandals, new product releases, interest rates, management changes, influential investors, etc.
That’s why the market price doesn’t tell you anything. It’s an almost “fictional” thing. And as investors, we don’t like that. We want reassurance, which we can get from the book value. It's what the company's assets are worth according to its balance sheet.
Imagine selling everything the company owns and paying off debts—that's book value. It's a snapshot of assets minus liabilities, giving an idea of the company's tangible worth.
Here are a few famous companies’ market and book values (as of September 26th).
I bet this makes you wonder.
Why the gap?
The market price tends to factor in the company's potential to grow, generate profits, and future prospects. Investors pay not just for what's on the balance sheet, but also for the story that lies ahead.
If a company shows promise, optimism tends to inflate the market price beyond the book value. And that is extremely dangerous.
One prominent example is WeWork. Touted as a revolutionary force in office space, its valuation soared to $47 Billion.
However, revelations about management issues, financial troubles, and an overhyped business model led to a drastic reevaluation. It’s worth $160 Million now.
So…WeWon’tWork (pun intended)
That being said, sometimes “the gap” makes sense, and sometimes it doesn’t.
It’s up to you to decide.
Nevertheless, it’s far safer to buy stocks where the market price is below the book value. Here is how you do it.
How to Find Good Stocks (With Low Book Value)
A few tips and tricks. I hope they come in handy.
Use Stock Screeners:
Utilize online stock screeners to filter for stocks with low price-to-book ratios.
Criteria: Set the price-to-book ratio to be below the industry average or customize based on your preference.
Focus on Sectors with Value Opportunities:
Identify sectors or industries that are temporarily out of favor or facing challenges, as this could lead to undervalued stocks.
Check Historical Price-to-Book Trends:
Analyze the historical trend of a stock's price-to-book ratio. A declining trend may indicate potential value.
Consider Tangible Assets:
Look for companies with significant tangible assets, like real estate or equipment that are worth more than the company says. These can provide a safety net for investors.
Compare with Industry Peers:
Compare the price-to-book ratio of the selected stock with industry peers. A significant deviation might signal an opportunity.
Look for Insider Buying:
Monitor insider trading activities. If company insiders are buying shares, it can be a positive signal of confidence.
Consider Market Conditions:
Evaluate overall market conditions. During market downturns, quality stocks may be unduly punished, presenting buying opportunities.
One more thing. Don’t get too hooked up on book value. While it may be important, it isn’t everything.
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." – W. Buffett
To get my best work, feel free to join the world’s most powerful stock market newsletter for wealth, stability, and happiness. And be sure to follow us on social media for related learnings and insight that don't always make it to these blog articles.
Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions. I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.