Post of the Day
October 27, 1998
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Subject: Re: Will the real valuation please stand up?
Well just to tackle book value, my argument would simply be that book value is an important valuation tool for some companies and a meaningless valuation tool for other companies.
I want to know the book value of a brokerage or a steel company, for example. The value of such companies resides largely in the assets they currently possess.
But for a company like DELL or MSFT (or even YHOO, AOL, etc.), I don't think the book value is nearly as important. When you buy these stocks, you are buying a revenue/earnings stream, not current assets. And some of these companies are able to make MORE money by having LESS in assets. That's a strength not a weakness but trying to measure them by book value won't show you this.
If the market cap of the S&P comes to be composed in larger % by companies for whom book value is not as relevant a measure than, by common sense, the book value of the S&P as a whole becomes a less meaningful valuation tool.
If the S&P were made up of all brokerages and steel companies and other heavy industrials, OK, go and measure the book value of the S&P. But if more and more of the market cap of the S&P consists of ultra-light companies like DELL, why would you want to make an investment decision based on the book value of the S&P.
Basically, I think you shouldn't try and fit a square peg into a round hole. Different stocks need different valuation tools.
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