When Benjamin Graham covered stocks, he used book value as his primary determinant in calculating value. He was well aware that when a company in distress goes on to survive, the share price of the stock can easily double, triple, or quadruple once investor certainty surrounds the pending survival. And if the company did not survive intact, the liquidated parts could sometimes still give you a positive return.
Although book value can still be a useful measurement tool in certain situation for bank and insurance companies, the usefulness of the metric has become outdated for three reasons:
#1. Companies employ far more debt today compared to the early 20th century. An industrial stock would carry one or two times its annual profits in debts back in the day, now it can range 4-8x that amount. When the business would turn, it was more common to close up shop immediately and … Read the rest of this article!