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March, 2014


One can make money based on discrepancies between the book value and price of common stocks. Overall, as an equity's book value, its per share assets less per share debts (sometimes also called "net asset value"), increases, so will its market value. This relationship is imperfect, so at times securities will be available that have a higher than normal book value for their share prices, and hence for each share involved there is a "low price to book." Say the stock's per share net asset value is $100, and yet its share price is $50. Its price to book value (P/Bk) = 0.5. Everything else being equal, this could be a bargain. With such a stock one gets a dollar in value for only fifty cents. Buy enough shares of this and similar stocks, wait for the usual direct correspondence between a stock's price and its book value to be realized, sell when the P/Bk = 1 or above, and one can add wealth.

Beyond this method of investing in individual assets, there is an approach that depends on similar relationships but applies to the portfolio as a whole. Over the long-term, the most one can generally expect from investing methods, even using such discrepancies between price and book value, is around 15% a year, including dividends. Yet this is not to be discounted. 15% annually, year in and year out, will double ones investment in just under five years. Such five-year doubling can make an initial $5000 IRA contribution at, for example, age 25, into a nest egg worth $1,350,000 by age 65, forty years later. Add in the compounded results of all the intervening IRA contributions, and one can see how a quite sizable nest egg becomes possible.

Of course, investments do not automatically go up 15% a year. It is messier than that. Sometimes they'll go up 40%, sometimes down 25%, sometimes there will be little or no change at all, etc. Nonetheless, on average a careful low price to book strategy tends to add around 15% of value annually, and that is all it takes for the above arithmetic to work very much in our favor.

Since stock indexes do not smoothly advance 15% or even 10% a year all the time, one is, at first glance, just at the mercy of market forces. Yet because there is this tendency mentioned at the outset for price to follow book value in a direct relationship way, so that wide discrepancies are likely to be eliminated given awhile (typically in five years or less), one can to an extent "guarantee" that 15% annual return by manipulating how much total book value and dividends are added per year.

Low P/Bk Dividend Stocks

to Book
Aegon, N.V.AEG$8.680.582.8%
American National Insurance Co.ANAT$116.710.742.6%
Argo Group International Holdings, Ltd.AGII$46.120.791.3%
Aspen Insurance Holdings, Ltd.AHL$39.050.781.8%
Cliffs Natural Resources, Inc.CLF$19.010.563.1%

For instance, suppose we accept that average figure and assume over time low price to book value stocks will have average annual total returns of 15%. Then one can merely increase one's total portfolio book value by a net 13% a year, regardless of market prices (some of which will be high and some low), while also assuring that the dividend yield (total annual dividends) on that total book value portfolio is 2% or higher. (Currently the mean yield of the Value Line Investment Survey's basic 1700 stocks is 2.0%, per their report dated 3/14/14, but if the average yield falls below that level, one can still guarantee the desired rate by purchasing more shares of stocks with higher dividends.) Because one is focusing on stocks with higher book values than their share prices, this can be done with a smaller investment than the intended book value target increase each year. That 13% increase in portfolio total book value thus might be attained with a significantly smaller dollar amount investment.

The first step is to look up the book value of each of one's stocks, multiply by the number of shares held, and add this product to similar products for each of one's other equity holdings. Suppose then that one had a total portfolio book value tally of $25,000 at the end of 2013 and that the combined portfolio dividend averages 2.0% ($500 a year). A 13% increase in 2014, while maintaining that level yield, only requires that one increase the total book value by $3250 this year and the annual dividends by $65. Yet since low price to book value stocks require lower investments than their book value for desired levels of increase, one might only need to shell out, say, $2500 or even less in dividend paying low P/Bk equities to attain the intended target for 2014. In this way, over a five-year period one can increase the total book value with dividends sum by $25,500 ($25,000 plus $500 in dividends) to $51,000 (i. e. $25,000 plus $500 in dividends, doubled) yet might only need to have invested $20,000 or less (P/Bk 0.8 or less), spread out over five years, to accomplish it.

This strategy gives one's portfolio a natural buoyancy, for book value that is higher than stock prices is like free money and sooner or later tends to be recognized as such by other investors.

If this method appeals to you, at the table above are a few candidate low price to book value stocks. They collectively offer average dividends of 2.32% with price to book value of 0.69. Do not take my word for it - instead doing your own research and/or consulting a trusted financial consultant - but for me these have as a group a good chance of doubling one's money over the next few years. If comfortable with a more hands on approach, I suggest holding each low price to book value asset till up 50% or more or for two years, whichever first, then selling and replacing with another good low P/Bk security. Benjamin Graham, the value investing pioneer, found that this technique tended to produce returns of 15% or better, net of commissions.

By increasing a portfolio's book value and dividend tallies at least 15% (total) annually, one can in addition greatly smooth out the risk inherent in common stocks investing. It also gives one something to do while awaiting the next bull rally. Further, the steady increase in book value is rather satisfying, particularly when one knows that: where book values go, market prices are likely to follow.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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