Selecting Good Companies (ROE, PB and PER)

[arthur]

P/B, by itself, is quite meaningless. You have to use P/B with other information like ROE etc. Even in the situation where P/B is more applicable, P/RNAV (or P/Expected book value) is more useful.

You are right to point out that P/RNAV is more useful. However the word "expected book value" is already self explanatory.
Not many ppl would be able to calculate to a good estimation. In fact, given a recessionary biz climate (which P/B would approach the lowest), the probability of P/RNAV getting lower is higher than avg (ie. sell assets for cost reduction,etc)

Finally, I wish to reiterate one of my earlier points. It is very seductive to conclude from d.o.g's analogy that one should always buy good business (or high ROE business) at reasonable prices. If you take a step back, the assumption behind d.o.g's analogy is that good business now implies good business in the future. And, this assumption is very tenuous, given the mean-reverting tendency of business performance.

Well.. for d.o.g analogy that good biz now implies good biz in future, that would depends also on the company biz itself.

Let's have a look at our forum top left header.

It shows Ben Graham with a caption "Investing is most prudent when it is most biz-like" simply implies by understanding the biz of the counter which one is buying, there exist a higher probability knowing whether this biz would survive thru the recession and emerge stronger.

Example: PG.

Proctor and Gamble-> a mega cap counter with hundreds of products selling around the world. Its products? Simply soap powder, toothpaste, dish washing detergent, etc. Yet, we can believe strongly no matter how bad the recession, PG will not collapse short of an accounting fraud like Enron.

PG P/B ratio approaches 2 when it was at March 09. Low P/B if we look at the value historically.


Still I respect thinknotleft's viewpoint on this and the reason why I'm bringing this up together with a case study is for discussion purpose and to let the newbies differentiate employing the P/B value freely vs. using it together with the understanding of knowing the biz organisation well.

No ill feelings alright?

Cheers!