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Oppenheimer Holdings Inc. Message Board

  • superbmetamorphosis superbmetamorphosis Jan 21, 2014 11:11 AM Flag

    The Fallacy Of Book Value?

    After reading the article on Seeking Alpha about OPY and regarding the fallacy of the book value ratio, I was surprised to read this “the easiest ways to be deceived is the book value metric.”

    It’s good to over-analyze the structure of the P/B ratio and whether it is a fair valuation method or not. To a certain point this is reasonable, however, what the article fails to point out is the comparison aspect.
    When I look at valuation methods like P/E or P/B or even when looking at risk statistics like Standard Deviation, I tend to compare these numbers vs. a benchmark. After all, what do these ratios really tell us as stand alone numbers? Why not look at it on another level? For instance, look at the intricacies of the P/B ratio vs others. Wouldn't it be worth exploring the comparison with sector peers or via comparison with historical mean P/B ratios before discarding the metric all together?

    It is not my intention here to suggest that the P/B ratio has fallen over that of its historical mean or is grossly undervalued vs. its peers because I don't have the statistics to prove that it is so. However, it is important for the investor to consider the main driving factors of the P/B ratio. Wouldn't these ratios be more relevant when used as a guide vs. other comparable historical or peer group valuations? These are questions that the investor should ask himself in response to such specific calls, instead of just following these analyses blindly.

 

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