What Happened to Price-to-Book Ratio in Value Investing?
Assets that are developed internally don’t appear on companies’ books and cause businesses to appear more expensive than they truly are.
Amazon’s process for turning millions of online orders into next-day deliveries isn’t reflected in its P/B ratio.
Photographer: Rachel Jessen/Bloomberg
Value investors rarely agree on how to pick stocks. Their objective is generally the same — to buy companies as cheaply as possible — but there’s no consensus about how to measure cheapness. Some look for a high dividend yield, others for a low stock price relative to a company’s assets, earnings or cash flow, and there are numerous variations on those themes.
For most of the past 100 years, it didn’t matter because value stocks paid by any measure. Sure, some value strategies performed better than others, but value stocks almost always beat growth ones and the broad market over multiyear periods, the notable exceptions being the years around the Great Depression in the 1930s and the dot-com bubble in the late 1990s. All value investors had to do was show up.