Investment strategy: Buy Low P/B stocks

Price to Book Ratio is defined as (Current Price of a share) / (Book Value of a share). The Current Price of a share is the current price on the stock market, while the Book Value of a share is the value of the share stated in the annual report. After liquidation of the firm and selling every brick, in theory, you should get book value. Therefore, the Current Price should be greater then Book Value meaning that Price to Book ratio should be greater than 1.0, but that is not always true.

In general, low Price to Book ratio of a company might indicate two things: the company is either undervalued or in troubles.

Step by step procedure in selection of a potential winner based on low Price to Book ratio:

1. Choose a company
2. Find Price to Book ratio for the company
3. Find Price to Book ratio for the industry of that company
4. If the PB ratio for the company is greater than the PB ratio of the industry go to the step 1 (choose another company).
5. Check the ROE ratio and its growth.
6. If the ROE ratio isn't growing, or if it is below average ROE for the industry, then go to the step 1 (choose another company).
7. Check for Debt to Equity ratio. If it is low (perhaps even zero) then this company might be worth to buy.

It is important to notice that low Price to Book ratio might mean that there is something fundamentally wrong with that company. That is the reason why you should check for other parameters to see if it is really something wrong with the company. Always assume that there is a reason why the company has small PB ratio, and look for parameters that confirms that. If you find little or no evidence that the company is in troubles, then consider this as a buy signal.

Investment strategies

Investment strategy is a set of rules that you are guiding you in the stock selection process. A complete strategy should answer several questions:

Which assets (stocks) you should sell?

For each stock in your portfolio, ask yourself "Would I buy this stock having some money to invest?" If the answer is no, you should probably sell this stock.

How much you should buy?


This is a complicated question. Well, the question is simple, but the answer is complicated and it requires a lot of math. To simplify answer here is a proverb "Don't put all your eggs in one basket". The more complicated answer is that you should read about modern portfolio theory. Fundamentals are following: You should know for each stock its risk and return. Knowing this you can select the portfolio with the highest return with desired risk, or vice verse, the portfolio with the lowest risk and desired return. To simplify this answer we could say: "Don't risk more than you can afford", "Don't risk much for little".

Which assets (stocks) you should buy?

The answer to the question depends on the type of an investment strategy you choose.

Here is the list of some investing strategies.

1. Buying low price to book value companies
2. Buying low P/E Ratio stocks
3. Buying stocks with lowest price to sales ratios
4. Buying stocks with highest dividend yields
5. Buying Loser Stocks
6. Buying stocks of firms with idea to replace bad management
7. Trading on News
8. Timing the Market
9. Investing in Small Cap companies
10. Investing in IPO
11. Trend following
12. Investing in Index funds
13. Investing on economic indicators
14. Technical investing

How to get rid of debt?

If you want to get rid of debts you should follow simple principles.

1. Track down your debts.

Create a debt book. Actually one sheet of paper will be enough. Write down for each debt, the name of your creditor, actual debt, interest rate and current date. You might add the amount of minimal monthly payment and payment due date. There will be about dozen of items. You might add costs of services that are necessary for you. For example, rent and car payments might be necessary for you, and they might not appear on the list (technically it is not a debt, you are just paying the services)

2. Prioritize your debts

There are several ways to prioritize your debts.

- pay the one with the biggest interest rate,
- pay the one you are afraid of (if you don't pay mortgage you might lose your home),
- pay the smallest debt (this way you will reduce the number of debts, and clean your mind)

3. Make a plan

The idea is to have no debts. In order to achieve this you should eliminate the first one. Using the list of debts, mark a debt you should eliminate first. You would probably like to eliminate your mortgage, but that is probably impossible, unless you have $200k on your bank account. Rule of thumb is to payout debt with the biggest interest rate.

So the plan is: "Pay minimal monthly payments for all debts, and pay as much as you can for the one that is marked as eliminate first"
Your financial goal is to payout that debt as soon as possible. With that on your mind whenever you want to buy something ask your self should I buy this or should I save that money and pay the debt? You might choose to pay a certain amount each month until it is payed out.

4. Stick with the plan until the debt is payed off. When you do that choose one of the remaining debts.

I forgot to mention STOP ACQUIRING NEW DEBTS!

What Are Futures?

In the world of finance, there are many uncommon and niche terms used, which are alien to the rest of the world. ‘Futures’ is one of those terms that is used to identify a form of a financial contract. Futures Contract is a standard contract, to buy or sell a certain asset at a certain date in the future, at a specific time. Usually futures contracts are traded on a futures exchange.


The futures contract detail the quality, quantity and the price of the underlying asset. Usually there are many motives for making a futures contract. Since it is a business agreed to be performed in the future at a specific time and for a specific price, the buyer of the underlying asset is protected against the price fluctuations of the asset in the market. This may result in profit or sometimes, a loss to the contract holder as there is an obligation to buy or sell at the specified price.


Many contracts in the financial world assign the ‘right’ to do something to the contract holder. Futures contracts differ in this aspect by assigning ‘right’ and ‘obligation’ to the contract holders (both parties) for performing what the futures contract details. Some futures contracts call for a physical delivery of the asset and others are settled in cash.


Many assets, especially commodities are subjected to futures contracts in futures exchanges. As an example, there is seller who would like to sell a high volume of corn at the next harvest. Although, the corn is not produced yet, the producer wants to make sure that a proper price is paid for the corn in the future. Then there is a buyer who is looking for corn from the next crop, who will be willing to pay the current market price for it or something similar. In this case, the seller and the buyer can form a futures contract on a specific price, through which both the seller and the buyer are protected against the high price changes.


There are two main traders of futures; hedgers and speculators. Hedgers are interested in the asset subjected to the futures contract and they seek to hedge out the risk of price changes. Speculators usually have no interest or practical use of the assets subjected to the futures contract. They usually buy futures for selling them later with profit to interested parties.


Futures and ‘Forwards’ looks the same in the finance market but they have two significant differences. Firstly, Futures are traded in Futures exchanges, but forwards are traded over the-counter. Secondly, Futures have a less credit risk while forwards carry a high risk.

The current economic crisis

“Crisis” is clearly not a pleasant word and when it is connected with the economy it surely isn’t too pleasant. But that is exactly what has happened world over as the economic crisis is stealing the lime light in the news, constantly making it to the headlines.


A crisis, be it economic or otherwise can never be attributed to one incident or event, instead occurs due to a chain of events, if not a cycle. But it could be averted by all means given those concerned parties are ready to address the issue, jointly.


From the dawn of the new millennium the globe experienced a sharp increase in essential commodities. Economists attribute this increase to various factors including changing weather patterns, rise of production cost and escalating wars. The situation began to change from bad to worse as several countries began to print money to cover up their expenses. This increased the inflation in almost all countries in the world. The crude oil prices then hit a record high of 147 dollars a barrel and as a result, transportation costs sky rocketed across the states.


The cycle kept on getting worse and the cost of commodities kept rising while the salaries of the average man remained the same, mainly because the companies were trying to deal with rising production costs. Organizations were also compelled to get rid of many of their employees as they could no longer afford them, resulting unemployment to hit the ceiling. This prompted many to obtain financial loans and those who had already obtained loans and mortgages could no longer pay their installments. On the other hand banks were a little bit greedy, so they were lending money even to those with low credit rating. Then, those with the low credit rates stopped to pay their debts. Banks had to start selling houses, and collect insurance. The result of selling houses was the decrease of real estate prices (about 15-20% in last 12 months). The result of collecting insurance was bankruptcy of great insurance companies. This left the leading banks in deep trouble as they faced a crisis of liquid cash and deposits. By then everything had blown out of proportion.


Dubbed the super power of the world, even the United States did not go untouched by this crisis. In fact, it is where this whole menace initiated. The situation aggravated as the dollar weakened day by day mainly due to US dependence on imports. Thus, leading banks began to shut down, the Dow Jones and Wall Street stocks came down sharply. It was only the beginning of the crisis as markets across the continents hit the downward trend. For an example, Iceland which was once considered as one of the wealthiest nations could not bear the heat on its own. It was thus prompted to seek the assistance of the International Monetary Fund to support its banking system. Over in the Middle East, Saudi Arabia pumped in 3 billion dollars to its economy to improve the liquidity in the market and even went on to cut its benchmark interest rates. Even China which boasts of the world’s fastest growing economy could not stand still as they quickly took measures to cut rates, amidst the crisis. But the biggest bailout plan is however being proposed by the US, a staggering 700 billion dollars.


How will it affect the average Joe is the next big question. Well, your savings will be at risk. Your job might be at risk. The prices of commodities will increase. As a result you will have less buying power. Since the shares are tumbling and companies keep losing, the dividends you are expecting at the end of the financial year might end up in a dream. Mortgages and other credits will be more expensive. Therefore cut the frills and stick to the basics, as that is the order of the day. If you have cash, this might be a good moment for buying stocks.


The whole crisis will not end any time sooner, but for the world to see light at the end of the tunnel all global leaders will have to reach a consensus to bail out of the situation, united. But an exact date could not be predicted as many say we have still seen only the tip of the iceberg.

What is Current Ratio?

Current ratio is one of the many financial ratios used for measuring the financial stability of companies. The main indication of this ratio is whether the company has enough resources (assets) to pay its liabilities over the next twelve months.

This ratio measures the company’s ability to pay back its short term liabilities with its short term assets. The current ratio is calculated as;

Current Ratio = Current Assets/Current Liabilities


Therefore, higher the current ratio, a company is more capable of paying off its liabilities. As an example, the company ‘ABC’ has current assets of $50,000 and it has current liabilities of $25,000. Then ABC’s current ratio will be 2 and it means that for every dollar the company owes, it has $2 available in current assets.


A decline in current ratios warns against increase in short term debts or decrease in assets. This is something that investors need to be aware of. Regardless of any other issue, a declined trend of current ratio means a reduced ability to generate cash.


If a company looks forward to its IPO (Initial Public Offering), many State Securities Bureaus in the US will require that the company has a current ratio of 2 or more. So what does this current ratio say to investors who are looking to buy shares? If you are planning to invest on shares, current ratio and its trend for at least one year needs to be analyzed. If the current ratio has been steady for all this time and now it is going down, that may indicate a recent problem of the firm or some economical impact resulting from share market collapse.


If the current ratio is declining for the past one year, then that company may have a permanent problem such as a bad marketing strategy or bad management. Investors need to be very careful with a company with such trends as it is a clear sign of declination. Therefore, it is best for all investors to always look at a steady or increasing current ratio before investing their money.

What is Quick Ratio?

Imagine a scenario where you invest all your money on a company and all of a sudden the company collapses. In an incident like this, only recovery for you will be the funds you will get after liquidizing the company. That is of course only if any money is left for share holders after the company is liquidized.

What can you do to avoid such a situation? You need to know whether the company that you are planning to invest has enough money and assets from which you can recover your money at the time of liquidation. Then there comes the important question; is there any index that shows liquidity of the company?

Yes, ‘Quick Ratio’ is the indicator used for identifying the liquidity of any company. This ratio is calculated by taking the sum of current assets and accounts receivable, and then dividing it by current liabilities. This method specifically excludes the inventory.

Usually, a quick ratio of 1 or higher is healthy for a company and it indicates that the company does not have to rely on the sale of the inventory to pay the bills. If the quick ratio is lower than 1, that means the company is in trouble and probably the new investors should keep away.

The formula for quick ratio is:

Quick Ration = (Accounts Receivable + Cash Equivalents + Cash)/(Accruals + Accounts Payable + Notes Payable)


There are also a few exceptions when it comes to quick ratio. As we understood, quick ratio indicates the liquidity of the company. But there are cases in which quick ratio does not give you the correct picture. Imagine a company with no bills due today, but having a lot of bills to be paid tomorrow. If you calculate the quick ratio today, the figure will show as having a good liquidity. But in reality, this company cannot be considered as having a good liquidity because of it’s uncounted liabilities that are pending.