Businessman Investor

Touching base with the rational business psyche of stock market investors

Wednesday, August 10, 2011

Being Intimate with Equity Value

How does a stock market investor, as a businessman, despite all the stock market noise, immerse himself and connect his consciousness in the underlying wealth of a company he invested in? Or to ask simply, what value does he immediately get upon acquisition of the stock? Crudely, the simplest, and easiest reference of shareholder value can be observed in the balance sheet account called equity. Equity, in theory, represents that residual value attributable to owners after paying all company debts or liabilities. Of all measures of value, it is perhaps the most objective, readily available financial figure for the inquiring investor (in contrast to an intrinsic value estimate which may have been derived from a financial spreadsheet model which in itself is prone to the “garbage in, garbage out” risk.

Value of the book. Equity value or book value is that residual value attributable to the shareholders. Increase in it through internally-generated earnings has a lot of business sense in it.
The idea is to view the value of one’s interest in a business not in terms of what its stock price is doing, but in terms of what its book value is doing. With this frame of thought, you’ll have the luxury and peace-of-mind to view your wealth in book value terms, and be able to subscribe to the idea that each increase in book value enhances the value of the business. Although I am well aware there are a lot of ways to measure value (e.g. discounted cash flow model), I foster this straightforward mentality (at least for now) for the sake of bluntly psyching the price-obsessed, market-conscious investor into a simple, rational business paradigm.

Focusing on equity (or book value as it is commonly referred to by accountants) gives the investor an idea or easy reference of how much value he gets from what price he pays for. Assuming this is the immediate value you get, one will have an easier time to accept that earnings—that which adds internally-generated value (i.e. by virtue of business) to book value—do really have a direct impact on the value of the enterprise, and consequently, your wealth (since you are a shareholder); thus, when the company earns, you do really have a share in those earnings. Commitment in internally enhancing book value engages the company to focus on profitable operations. Plainly, book value has a lot of business sense in it.

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The information presented here is for educational purposes only. Under no circumstances should it be construed as a recommendation to buy, sell, or hold any stocks. If you choose to use this information, you do so at your own risk.

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