Subject: Re: OT Value Metrics - P/B works best
Hmmm...Never trust an academic-seeming paper?

The most important thing to know is that low P/B is emphatically NOT a good way to find a good investment.
It is mainly a good way to find a poor business: one with low returns on capital.
Admittedly, if you're searching only among similarly poor businesses, it will find you the cheaper ones.

On the assumption that stated book value is a reasonable proxy for the replacement cost of working assets,
book value is a reasonable proxy for the value of a company with precisely zero barriers to competitive entry.
But why would you want to own such a firm?
That's because you're implicitly measuring the cost of the assets a competitor would have to assemble to set up in competition with you.
Book measurement works in a meaningful way only if that's something the competitor could do. You don't want a firm in that situation.

Value ultimately comes from earnings, for good companies at least.
Imagine two companies with relatively comparable earnings lately and currently.
One of them needs a whole lot of assets to generate those earnings, and one needs almost no assets to generate those same earnings (a low book value).
Which is probably the better business to own? The latter, of course.
Especially if there is any growth to be anticipated: the first company will have to raise a lot of new capital, the second one won't.
But more importantly, the second one is demonstrating that competitors are seemingly unable to compete away their unusually high return on assets and equity.
On the simplifying assumption that the two firms are trading at vaguely comparable multiples of earnings, the good business will be at the high (seemingly expensive) P/B and the "bad" company at a low (seemingly cheap) P/B.
In other words, the very best businesses with the best returns tend to trade at high multiples of book value, even when they are not trading at high multiples of earnings.

Empirically, it's easy to see.
2003-2022 (20 years), selecting from among the Value Line 1700 set of companies:
CAGR of an equally weighted portfolio of the most "expensive" firms by P/B: 16.2%/year.
CAGR of an equally weighted portfolio of the "cheapest" firms by P/B: 6.7%/year.
Give me the expensive ones.

In fact, a portfolio of only those firms with positive earnings and negative shareholders' equity (infinitely expensive by P/B) works pretty well.
i.e., the most extreme possible example of the opposite of what the authors suggest.
I checked: book value negative, trailing earnings > 0, current earnings > 0, and expected earnings growth rate > 0.
Equally weighted portfolio of however many stocks met all those criteria, reconstituted quarterly, allowing 0.4% trading round trip costs.
That beat the S&P 500 total return by 4.70%/year 2009-2022.
Average number of stocks held = 33.
Some current examples: Autozone, Dell, Home Depot, HP Inc, Starbucks, YUM Brands, Oracle, MSCI, Altria.

Jim