There are no set rules in investing. The only thing that counts is buying at one price and selling at a higher price. While market conditions can sometimes create environments where stock prices are going up, long-term success requires a process in evaluating businesses that are trading at attractive prices. When used and understood appropriately, buying below book value can yield satisfactory results.

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Book Vs. Real
As the name implies, book value is the net value of a company's assets on the books, or balance sheet. As such, investors should be mindful that book value may not be an accurate approximation of business value. Assets are only as valuable as the earnings they can produce. Valuable assets are going to be worth much more than book value and vice versa.

The Coca-Cola Company (NYSE:KO) is a terrific example. Shares trade for about $67 or 4.6 times book value; shares will never trade for book value again. The company's assets, such as bottling plants, recipes and its brand, deliver tremendous profits to the company and are worth much more than stated book value.

Right now, financial companies are finding it very difficult to make any money. As such, book value, a very useful metric in the financial industry, is often higher than the current stock price. Citigroup (NYSE:C) shares trade for about $28, while stated book value is over $60 a share.

The discrepancy exists because investors are having a difficult time determining what many of the company's assets are truly worth. More so, uncertainty about the future profitable of the company leads Mr. Market to discount the market price, relative to book value. (For related reading, see The 4 Basic Elements Of Stock Value.)

Possible Opportunity
When a company trades below book, that's the market's signal that it is uncertain about the future value of the assets and earnings they will produce. However, if the company can overcome that uncertainty in the future, then buying below book today, may offer possible opportunity to buy at a cheap price.

Mining company Terex (NYSE:TEX) currently trades for about $15.40, or about 85% of book value. Business is weak today for Terex, but the company has been positioning the business for an eventual recovery. Terex has the ability to earn significant profits in a more normal environment and shares will likely trade well above book, when that occurs.

South Korea's POSCO (NYSE:PKX) is one of the best operated and efficient steel companies in the world. When the steel industry is weak, as it is now, shares in steel companies sell off, as no one wants the assets. Today PKX trades for $82 a share, less than eight times forward earnings and against book value per share of about $110. However, if you wait for the steel industry to pick up, shares will be trading well above book value; that's how the market works.

The Bottom Line
Properly understood book value can provide a quality proxy for making an investment. Buying below book value, when done with businesses facing temporary headwinds, can provide investors with a safe and consistent investment approach. (For related reading on book value, see What's The Difference Between Book and Market Value?)

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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