No. of Recommendations: 7
The theory behind this is certainly sound. But the fact remains that SO FAR, a simple multiple of book still gives almost precisely the same "fair value" levels as very much more sophisticated measures of value.
I agree with Jim's observations.
Consider that cash, fixed income, and equity investments (adjusted for deferred taxes) all come in a 1.0 P/B. While wholly owned businesses certainly deserve a higher multiple - sometimes much higher - they are all relatively slow growing. And new acquisitions also come onboard at 1.0 P/B.
So it's going to take a very long time for growth in the old wholly owned businesses to change the P/B ratio upward.
Hence the importance of Jim's final comment.
The amount of value arising from the operating subsidiaries versus investments per share is certainly a big factor, but I haven't found that the fraction has really budged (net) in 20 years.
