Warren Buffett: Book Value Does Not Matter When Analyzing Stocks
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- Опубликовано: 8 янв 2023
- Many will be shocked to hear famed investor Warren Buffett saying that book value does not matter when selecting public companies to invest in, but he has actually made clear many times that earnings or free cash flow are what need to always be focused on.
I have been working in a major IT company for many years and every report I created for business planning meeting was designed to align with my bosses gut feel. Projections are like anecdotal evidence, which can provide anything you wish.
To put it short, it's wishful thinking.
as Warren points himself, book value is pointless when serious amount of money is involved. I am living in a small economy country where stock market doesn't have many investment competitors and therefore P/E is not insane as in US. In US P/E of 10 is considered cheap and occasionally we can see stocks that have 100.
Where are you living ?
He is talking about book value, not P/E.
Three important aspects:
1) your attitude towards stock market.
Chapter 8 of Intelligent Investor book.
2) Margin of safety principle
3) looking at stocks like businesses.
Book value is an accounting term. And even accountants don't use it any more (and haven't for a long, long time). If you're investing, there are countless better metrics for evaluating the value of an economic enterprise - but the bottom line is if you are investing, what matters is your belief about what is likely to happen in the future, not what has happened in the past.
I like that last part you said.
let me rewatch it many times to sink it in
Love that you post these 🙌🏻🙏🏻
What about for book value specifically for insurance companies?
i thought he's big on book value as it gives you an idea of how much margin of safety a company has now i am lost
I thought so too... But I think he's not saying someone with smaller amounts shouldn't consider book value. He's saying for scalability with the sort of large capital he has to deploy its preferable but more difficult to look at future earnings
He’s saying that it’s more important that a business is going to make more money in the future vs having a good book value because a good book value doesn’t mean a business will have a good return on earnings in the future.
@@tajsalaam8850 absolutely. Charlie Munger said elsewhere that buying something below its book value doesn't matter unless the company is going to liquidate itself and realise the difference
Book value only matters if it's near or less than 1.0x because in "theory", you can acquire the whole company and liquidate its assets for a higher price than what you acquired it for. However, in many cases, book value is not an accurate representation of the MARKET value of the assets of the business (e.g. Service companies and software companies, which have very few tangible assets that you could liquidate). So essentially P/B does not matter because it's only useful in certain cases (e.g. Banks stocks, Distressed companies, or an asset-heavy company such as in industrials). Hope this helps
Earning is more important than book when he is buying shares. Book value is a consideration when he is giving out loan.
This is stupendous!
Thank thank u so Mach
The book he recommends says book value per earnings are important.
I’m confused - then how is he building out his DCFs? Obviously I get the idea of not taking the sellers projections (biased and reasons ^). However, are they themselves not making projections, is that not the base understanding of a “companies future earnings”.
It's All About The stonks mate, AMC to Mars
Book value correspond to net assets or equity, not earnings
they don't make DCFs, elsewhere they've said that if they have to make a DCF for a company then they aren't sure enough about the company's future. In other words, they have to convince themselves to such a high degree of a company's future earnings that a DCF isn't even necessary.
From what I understand, they're more interested in long-term investments, DCFs from my experience is used more in PE when they're trying to exit within 5-10yrs. If you're looking at a company and investing based on if they will be around 15-20yrs from now and their true value in terms of what they're actually providing and not just from a numbers standpoint, DCF becomes less important. Of course you need to make sure you're not overpaying but I'm sure they have other ways of calculating what a company is currently worth but more importantly what it needs to get to that next level.
There is no value in anything if valued so do it without value❤❤🎉🎉
what year was this meeting?
1995
This is not true when evaluation banks stocks though correct?
Correct. 1.5 to 2x are fair bank valuations.
👁you looking sharp 👹👌
Buffet is using the example of a dying business growing at 5% on it's book value from the perspective of an investor with significant capital. The 5% figure is key here. For new investors with small amounts of capital to invest, turning over rocks and finding some businesses with a low P/B value can be extremely rewarding. Particularly small caps. However investing large capital into dying businesses from Buffetts situation simply does not make sense. The thing people are missing here is context - every investor is different.
I just bought WBD based on book value 😵
Book value 70b, mcap of stock 22B, FCF ~6 💥💥💥
Well BV itself is kind of unimportant in the sense that if you have 70B of BV in cash that's very different than 70B in intangible assets, which may have some value but only what someone else will pay for it. You also have something like tangible inventory being worthless like Kodak or PPE being worth less more than is stated like an oil refinery. So as opposed to BV you're really looking for Discounted Total Replacement Value - Total Liabilities. That's how I try to think about the book value type investments.
Media multiples are going to be crushed in the next decade. Between netflix, disney, youtube, gaming and all the free content being pumped out everyday. How any company charges for content is beyond me. The only way to win is to have a strong and growing advertising network in which case WBD is probably not the best either.
@@iceman18211 Nothing is going to be free in the future, everything will be subscription based or you will get bunch of heavy advertising for free content. Streaming will turn to same thing as tv, few big companys are going to buy smaller ones and you ll have near monopoly on prices, content and all...
@@boratsmagadijev940 I disagree, mainly due to the tech hardware and software required to run these types of organizations becoming cheaper and cheaper ex: Smartphone data has become cheaper and the demand for internet video has grown lowering the marginal cost per user. But you might be right. However if that is the case I don't see WBD as a significant winner in the space, at least not compared to Google, (RUclips) Amazon (Twitch) and Tiktok.
wbd stock is going down and doesn't look like reversal is soon. If i were to buy, i would at least wait for first quarter with positive earnings
It's true came here wanting to believe in people im more busy unbelieving people❤❤🎉🎉
Surely buffet does not buy high price on good business
So, just buy strong companies that you like and hold them.
If you can hold for 10-20 years.
@@robertagren9360 If the company produces something valuable enough to be here 10-20yrs from now or has the potential to be here that long.
I weight bookvalue heavily
Charlie munger also said that a p/e bellow 12,5 and a pb bellow 1,25 is a sign of a good price entry. I also add a good dividend yield with distribution bellow 50% earnings
o it does count do to it was idenity theft data breach
Huh? He'd rather look at businesses with higher multiples because they're more likely to be better companies. That's not value investing.
I think its valuable when evaluating a REIT
For a public REIT where NAV/book value is marked to market continuously, sure - B:P is basically your cap rate. For private REITs, the NAV is often complete BS so who knows what the effective cap rate is.
And yet Warren evaluates himself by Berkshire book value, not by Berkshire stock price. Ha!
I would like to add 1 more book
1. Playbook To Millions
It’s from selling that weaving loom at auction for pennies on the dollar that he learned book value is just 💩.