Daily Gains Letter

fair value


Using This Measure Could Kill Your Portfolio Returns

By for Daily Gains Letter | Apr 29, 2013

Using This Measure Could Kill Your Portfolio ReturnsA question that gets much attention among investors is how, exactly, to find the fair value of a company. The reason behind why this question is the focus of so much attention is very simple: once an investor finds the fair value of a company, they can make investment decisions accordingly. For example, if an investor finds the fair value of a company to be $1.00, and if the market price of the stock is $0.50, they may consider it to be undervalued and buy stocks in hopes of making a decent rate of return.

To find the fair value of a company, investors may look at many measures, but often, investors may predict the fair value of the company by just looking at its book value per share.

At the very core, the book value per share of a company is simply the difference between its assets (what the company has) and its liabilities (what the company owes) divided by the number of outstanding shares. This value provides investors with an idea about the price per share if the company stops doing business immediately.

For example, if a company has assets of $1.0 million and liabilities of $500,000 with outstanding shares of 100,000, then the book value per share of the company will be $5.00 per share.

Keeping all of this in mind, does this value actually tell an investor anything about the company’s future growth? The sad reality is that no, it doesn’t.

First and foremost, investors should know that the book value per share of a company is just a static calculation based on past results. Companies … Read More