It may seem contrary to some investors to invest in Low Price to Book Value Stocks. After all, isn’t there a reason the stock price in relationship to assets is beaten down? Yes, probably. Is it enough that Ben Graham made money using a version of a low Price to Book investment strategy?  For some investors, yes. Luckily we have some empirical evidence supporting this investment strategy. There are several studies that lay out the case for investing in these type of stocks.

Roger Ibbotson published his landmark study, “Decile Portfolios of the New York Stock Exchange, 1967-1984″ in 1986. In it he broke down the stocks trading in the New York Stock Exchange (NYSE) into deciles or 10% groupings, by price as a percentage of book value. He discovered several astonishing things.  First, that  the highest 30% price to book stocks, over the 17 year time frame, underperformed the market as whole by over 3% per year. But better for value investors, Ibbotson discovered that the lowest priced 3 decile’s as a percentage of book value returned a compounded annual return of about 14.38% or 5.78% above the NYSE Index for this period. Or the value of one dollar invested in 1967 would be $12.85 in 1984.

I am not suggesting you run out and by every low price to book stock available. But it is a good world to search in for investment candidates. In subsequent posts I will examine other studies that clarify the work of Ibottson and extend our understanding of what are the best ways to capitalize on the information we have.

2 Responses to “Investing in Low Price to Book Stocks- Value Investing Series”

1. FI
   March 2nd, 2010 @ 3:35 pm

   Interesting. There are a lot of challenges out there for today’s investor—it can be difficult to make informed decisions. This site, http://investor.fisherinvestments.com/, features a number of helpful investor resources. This company is a client of mine and I have recommended the site to a number of my friends looking to learn more about investing.

2. chroma
   March 2nd, 2010 @ 8:01 pm

   Ordinarily, I would not post something that feels like a for profit plug. But I have respect for Ken Fisher’s success and I have planned, but not gotten around to posting about him.

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