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