Financial Reference

This post continues a discussion of the screening criteria in Brandes’ book “Value Investing Today.” His third screeening criteria (I’ll get to the second in a later post) is that tangible book value is above share price.

This criteria is old-school Graham and Dodd. Not even hard-core value investors like Warren Buffett follow this criteria anymore.

There are a couple reasons for this transition. First, companies selling for less than book are harder to find today — not impossible — but harder. Second, most of the companies selling for less than book today either have some losses coming or have an overstated book value. Third, and most importantly, companies selling below book value are likely to have lower returns on capital.

In other words, screening based on book value can find companies selling at a great price, but it also likely to find mediocre companies. Companies selling below book value are likely to be companies with low returns on capital.

One of the major reasons for this is that great companies often have large intangible assets in their brand names. For example, you will likely never see the classic Buffett investment Coke selling anywhere near book since most of the value of the company is intangible.

Paraphrasing Buffett, I would rather own a great company at a good price, than a good company at a great price.