IFB171: Why Price to Book Died; VTI 7.0 Update

Announcer (00:02):



I love this podcast because it crushes your dreams of getting rich quick. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now.



Dave (00:33):



Well, welcome to the Investing for Beginners podcast. This is episode 171 tonight. Andrew and I will answer a great listener question because it discusses something we’ve wanted to talk a little bit about. So I’m going to go ahead and read the question, so we have a good morning, Andrew. Thanks for the awesome podcast. I am new to investing and wanted your opinion on the price to book. Many of my peers think of the price to book as a ratio of this should only be used by banks. They think to evaluate companies such as Microsoft using the price to book is not appropriate. Can you explain it? Thanks, John. Andrew, what are your thoughts on this?



New Speaker (01:11):



It’s a great question. And I have a lot of thoughts. So we’re going to spend a lot of time on this today. As Dave said, it is a little technical, and so if you’re an absolute beginner, I would recommend going to episode four, the two, and start on the back to the basic series.



Andrew (01:28):



Or you can go back to episode 21, where we talk about the Benjamin Graham formula that mentions the price to book ratio a little bit, or you could read the seven steps ebook and that intros that pretty well too, but price. The book is very controversial, and it’s near and dear to my heart because you know, I’m a value investor at heart. When you hear us say invest with a margin of safety, that’s a concept that goes back to Benjamin Graham, Warren Buffett’s mentor. And he was somebody who invented value investing in a sense. And so being somebody who’s a value investor, I’m constantly trying to reduce risk by buying companies that are trading lower than their intrinsic value, lower than what they’re worth. And so as a value investor, price to book is something that is usually associated with value investing.



Andrew (02:26):



And it’s something that as time has gone on, my opinions on the price to book have changed. So, you know, in a nutshell, price to book is talking about the relationship between a company’s book value and the price it is in the market. So, you know, price-earnings is PE price. The book PB and book value is a company’s assets minus its liabilities. Then, the idea of buying companies at a low price the book was popularized. I think it started to get popular when Benjamin Graham wrote the Intelligent Investor. And that was his second book. And so, you know, he, he had a couple of formulas in the book that he shared.