For many investors, the answer is elusive. They sort of know what a stock is but when pressed they don't fully understand what it is they're buying when they decide to invest. Usually they respond with something like: "I'm buying a company." And that's right. But specifically, here's what they're buying.

When you purchase a stock, you buy two things: a percentage of the Book Value of a company and a percentage of earnings in the future. Let's look at Book Value.

Continue reading Comfort Zone Investing: What Is a Stock?

Comfort Zone Investing: What Is a Stock? originally appeared on BloggingStocks on Sat, 05 Jun 2010 10:30:00 EST. Please see our terms for use of feeds.

Walter Schloss and the triumph of book value originally appeared on BloggingStocks on Tue, 29 Jan 2008 17:43:00 EST. Please see our terms for use of feeds.

A piece in today's Wall Street Journal looks at the decline of so many home building stocks and the metric that sent so many value investors chasing a falling knife: Book Value. Book value is a defined as a company's assets minus its liabilities, and can give a quick indicator of whether a stock is really cheap.

But what got investors who chased home builders into trouble was that the companies ending up having to take write-downs because of declining land values, and they ended up in a classic value trap: The stock just wouldn't stop becoming a better deal!

Investors will continue to argue about the future of the home builders. But the issue that has some value investors scratching their heads is this: When companies write-down their book values as their businesses decline, how helpful can book value really be?

Adding to this, a decline in stock price can actually lead to a write-down of intangible assets, as recently happened at companies including PlanetOut (NASDAQ: LGBT) and Lenox Group (NYSE: LNX). So what good is book value?

It's very good. It's so good in fact that super-investors like Carl Icahn and Warren Buffett used it to screen for cheap stocks early on in their careers. Buffett's best returns came with his investment partnership based on the principles of Benjamin Graham, which are all about book value and liquidation value.

I frequently use book value to screen for very cheap stocks. But most of them turn out to be junk, and they deserve to be cheap. Book value is a great way to find potentially interesting stocks, but strong bottom-up research must follow.

Exploring the limitations of book value originally appeared on BloggingStocks on Mon, 09 Jul 2007 19:30:00 EST. Please see our terms for use of feeds.

Carl Icahn has made a few bucks over the years and wants to make some more on Time Warner (TWX). Seems like he has had to cool his heels lately upon making some compromises in his discussions with the TWX Board about his desire to sell off some assets. I think what has him so animated is Time Warner's book value which is a 1.25 multiple. Consider the following comparisons.

• Comcast (CMCS.A) has a P/B of 1.66. -- Cable
• Knight Ridder (KRI) has a P/B of 3.6. -- Publishing
• Disney (DIS) has a P/B of 2.2. -- Movies/TV/Entertainment
• Yahoo (YHOO) has a P/B of 5.88. -- Internet

If you figure that some assets do not have a 1.25 P/B then you must  figure that many holdings should be valued way over considering how much is aggregated into TWX. You can see in comparing TWX's book value to other competing companies with more segregated businesses that the multiple could be much higher; but even a small increase would mean billions in added value.

Icahn and his fellow instigators ... I mean investors, surely see this. So maybe TWX has some upside. As a shareholder I can tell you that is why I have hung on. However my entry point is far less than today's $17.20 price and I can understand why others are less patient. This will be something to watch because Icahn has to be on the less patient side as well.

HEY Time Warner ... Icahn knows of what he speaks! originally appeared on BloggingStocks on Wed, 07 Jun 2006 22:58:00 EST. Please see our terms for use of feeds.