Book Value is not the real indicator for any stock

Samprad78 By Samprad78, 15th Feb 2013 | Follow this author | RSS Feed | Short URL
Posted in Wikinut>Money>Investing

Book value defines the tangible assets of the stock and is in no way an indicator to buy a stock

Book Value is not the real indicator for buying any stock

Book value of the stock can be a critical indicator of its strength. But is it the real fundamental indicator for buying any stock? Many investors who believe in long term investments would believe so. But that’s not always the case. There are a lot of problems with the Book value of any stock. It really provides you a clearer picture of all the tangible assets of the company but in no way is it the real fundamental indicator for buying stocks.

Initially when I was not a stock market maniac I used to attach a lot of sentimental value towards the book value of any company. Many stocks that I bought were solely because of its higher book value. A few years ago I bought the stocks of a company that traded at 50% of its book value. It looked quite an attractive bet. It seemed that the company was doing quite well but for some reason I never knew what was wrong with it for trading at such a discounted price. I never tried to find out and that really was the biggest mistake in my investment strategy.

The problem that the company faced was bad management. It seemed the management had taken a lot of unhealthy decisions and in fact the higher book value was all because of certain realty investments that the company had made across the country without any distinct goals. Most investors had realised this and had stayed away from the stock. However in my case I felt that the stock had been neglected and would soon turn into a multibagger.

I was dead wrong. In a few months the stock started quoting at 20% of its book value. I realised that it was probably an end to it. I got rid of the stock but even today after 5 years the stock has stayed pretty much untouched and unmoved from those levels.

I really understood that Book value is not the critical indicator for any stock. It all depends on the business, management, profits, revenues and brand value.


Book Value Is Not Real Indicator, Book Value Of The Stock

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author avatar Fern Mc Costigan
7th Dec 2013 (#)

Nice post

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