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The innovative financial analyst, author, and teacher, Benjamin Graham, pioneered the focus on low price-to-book-value equity selections. He reasoned that some other value criteria, such as the popular low P/E, or low price-to-earnings ratio, are more susceptible to accounting manipulations and suggested that, sooner or later, a low price-to-book stock's price will rise to (or above) its net asset value, resulting in profit for the "bottom fisher" type investor. And, indeed, in over a half-century of his firm's experience with the purchase and sale of low P/Bk stocks that initially had price-to-book ratios of about 0.8 or below, they noted annual total returns averaging in the 15-20% range.
Despite both Ben Graham's record and that of AAII and others, as well as the relative simplicity of finding sufficient low P/Bk candidates from which to choose, this investment approach has never truly caught on. And, for a contrarian or value investor, that is definitely a good thing! "Too many cooks spoil the broth," as the saying has it. Chances are, if most investors jumped on the low P/Bk bandwagon, the bargain status of the better picks in this genre would disappear, the stocks' prices being bid up at the first mere whiff of savory value, so that this currently excellent buying-at-a-discount technique would no longer be profitable.
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