Investors often times look to quick and dirty ways to assess value, but James Berman JBGlobal warns that this can be misleading. In his fifth edition A Problem of the First Order, Berman challenges some of the age old notions of using simple yardsticks, such as the price to earnings ratio, as a sensible gauge of value.
Trefis has teamed up with Berman to release a premium subscription-based, interactive report called the Berman Value Folio where he shares his candid and often contrarian investment views. He relies on Trefis analysis and modifiable tools to summarize his outlook and invites readers to tag along and use these tools to challenge his rationale or create their own views on stocks. He also examines the key business drivers and various “stress tests” on the company to see if the value holds up under bearish scenarios.
In the four months since inception, the Berman Value Portfolio is up 14.1% with household names such as Citi, JPMorgan and eBay up around 35% since he added them.
Below you can read an excerpt from his latest edition and visit our site of for subscription details.
A Problem of the First Order
By James Berman
There’s the old story of the man looking for his glasses. His wife asks him why he’s looking in the kitchen when she last saw them in the den. “There’s more light in here,” he replies. In our laziness, we humans tend to solve problems by choosing the path of least resistance, even if it’s less likely to work. Investors are no different: they tend to look for “first-order” indicators, simple shorthand bits of data that are easy to pluck out of a complex world.
Trouble is, these bits are often flawed. Price-to-earnings (p/e) ratios are a good example. The humble and ubiquitous p/e, a fraction solved by dividing the price by the earnings, fails due to its very simplicity. The idea of comparing Coca-Cola (KO) and Pepsico (PEP) based on p/e ratios looks like a good idea. Until you realize that those two companies are in completely different businesses. Despite that familiar expression to denote sameness – “it’s like Coke and Pepsi” – half of PEP is the snack division Frito-Lay, while KO makes only beverages: