YouMaketheCall 147Neither of these groups is correct, for it is logically impossible
to say that any person is correct about the future. But these sorts of
expectations—founded in the infinitely complex map of human psy-
chology an dexperience—furnish the un derpinnings of the returns
the market generates. Great expectations are inherently unreliable,
an dthe circularity of market metrics remains impenetrable.
Once you have made the call about value, you have to go to Mr.
Market to see what prices he is offering. While there, compare youres-
timation of value to a few price ratios before making a final decision.
There is no guarantee that stocks with low price ratios offer value
higher than their price, but they are a goo dplace to look. Nor do
high price ratios automatically mean a stock is unattractive, since
price still may be lower than value.^14 Businesses with attractive op-
erating climates, liquidity and performance measures, and earnings
records deserve a close look, particularly but not exclusively if all
the price ratios are low an dthe return on equity is high.
Price/Book Ratio
The relationship between a company’s stock market price an dits
book value is calle dtheprice/book ratio (P/B ratio).Itisequaltothe
market price per share divided by book value per share.
Comparing the P/B ratio of one business with its peers is a way
to gauge how investors regar dthat business compare dto others or
the industry average. Higher P/B ratios mean that investors regard
the stock more favorably.
The average P/B ratio for publicly traded stock in the early 2000s
is around 2 to 3.5, with older, industrial companies (such as steel
companies) sometimes trading at P/B ratios near or below 1 and newer,
technology-oriente dcompanies (such as computer software manufac-
turers) sometimes trading at P/B ratios as high as 20 or more.
In our crop, Amazon.com’s P/B ratio leads the league at above
40, with Microsoft at about 15 an dGE at 10. While none of these
fits the bill, if you fin da stock tra ding below a P/B ratio of 1, you
can buy that stock for a price below the company’s net worth. Such
stocks are rare an dcertainly warrant further investigation.
Price/Sales Ratio
For most companies, a strong relationship between a company’s
value an dits sales levels shoul dexist. Sales drive growth. More sales