Monday, January 16, 2012

Book Value and Alcoa

This evening  I was coming home from dinner with a friend and he casually mentioned to me that he has started to dabble in the stock market. I asked him "how so?"

He said he had been reading books on investing and I asked "which one?"   He said it was a well known book by Benjamin Graham, but he couldn't remember the title.  I just assumed it was "The Intelligent Investor: A Book of Practical Counsel"

The whole situation was fascinating to me-he's a bright guy who knows very little about the market or investing. It was the simplicity of his thought process that made it so interesting to me.  His thought was-I want to invest in the market; What does he do?  He reads a book by a well known, successful investor. He told me the lesson he learned was to buy a stock whose price is under its book value. Brilliant!
He also mentioned that Graham says to buy a well established company that has a long history of earnings/profits.

Then I asked "which stock did you buy?"

He said he bought Alcoa at about 8.70. My first thought after he said Alcoa was "that sounds pretty good to me."  I had been reading a little about Alcoa and also knew that Jim Cramer thought it was ridiculously cheap and that someone could actually come in and make a bid for Alcoa at these price levels.

The first thing I did when I got home was look up Alcoa, well my friend was already up about 12%  in a week. It's current price is $9.80. I then looked up the book value and lo and behold, the book value is $13.98, about 40% less than where it is right now.

The lesson is that, with a little bit of homework, we can all outperform the market and most money managers,  to boot.

I just want to leave you with this one remarkable FACT:
75% of all money managers UNDERPERFORM THE MARKET


Start Date: 12/12/2011
Starting balance: $10k
Current Balance : $11,251
Gain: 13%

About this donation request, PLEASE if I have made you $$$, donate $10 to cover my Ameritrade trade cost. I would really appreciate it. Thank you so much.

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