Digital Wealth by Simon Moore

Author:Simon Moore
Language: eng
Format: mobi, epub
ISBN: 9781119118473
Publisher: Wiley
Published: 2015-11-10T00:00:00+00:00

James Tobin, 1981

James Tobin developed a powerful insight for market valuation. He looked at the value of the stock market relative to its book value. Book value is an accounting measure of the total assets of a business after liabilities are deducted. This is an accounting measure of what a company’s stock might be worth based on its balance sheet. He identified that if a stock were trading for more than the value of its net assets, then it would be rational to buy a similar set of assets rather than buy the stock. So, for example, if a company that owns a factory making toys is trading significantly more than its book value, then an investor might be better served by constructing a similar toy factory directly rather than buying the stock, because building the toy factory would be a cheaper way to get to the same result. Equally, if a stock traded for less than its net assets, then buying the stock was the rational course. Both of these actions would serve to bring a stock or a stock market back into line with its book value, and hence book value provided a reasonable metric of valuation.

Of course, there are also some accounting considerations with this approach, since accounting book value may not always equal true replacement cost due to depreciation and inflation, but the insight is a powerful one in offering a clear logical principle to determine fair value for stocks. One can look at the value of a company or an entire market and gain insights into its long-term valuation. If the ratio of stock value to book value exceeds 1, then the stock might be overvalued; if the book value is adjusted to capture the true replacement value of all assets, then the company is overvalued according to the same argument.

Building on Friedman’s insight, Tobin offers a way to determine when markets might be particularly attractive or expensive.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.