Website owner:  James Miller

Book value --- significance to the value of a stock

  Book value.  Of what significance is book value to the value of a 
   stock?  

   Consider the following.  In a TV news report a day or two ago 
   was a story of a fellow that had invented a new jump rope, made 
   by stringing ceramic beads on a rope, that was selling like 
   hotcakes.  He had a whole bunch of people sitting around 
   stringing beads on ropes and he was making millions selling 
   them for $5.00 apiece (presumably he had a patent which 
   prevented anyone else from doing it).  What do you think the 
   book value of this operation was?  Probably, essentially zero.  
   What would you say the value of the operation was?  If it is 
   bringing in millions in profits it is worth a lot.  No book 
   value but worth millions.  What determines its worth?  Its 
   worth depends on what you feel its potential is in regard to 
   the income stream you feel it can generate --- which depends on 
   the demand for the product and how long you think that demand 
   will continue.  

   The pricing of a stock is determined primarily by its earnings and 
   the public's perception of its potential for future earnings, or 
   perhaps by crowd psychology and irrational buying, but not by book 
   value.

   Feb 1996