Readers of this blog know that I've been salivating over Goldman Sachs for about a year. The stock was over $200/share back then. I wasn't buying then, but I was eyeing it, waiting for it to get below $140. As I write this, it's trading at roughly $69 a share. Shouldn't I be ecstatic? I'm not.
Why? Fear plain and simple. Every investment book that I've read has spread the gospel of dollar-cost averaging and how simple, yet powerful a technique it is. The books never mention that it's much easier to do when the stock is appreciating.
I'm not scared so much by the falling stock price, but because I'm not sure how to evaluate this company anymore. Earnings don't work because I don't know if they'll be around next quarter. Normally, I would rely on book value, but that could be equally ephemeral.
Book value is the net asset value of a company, the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. It's a good metric to compare against the market value. If you really want to be a stickler, than you can use the tangible book value, which takes out the value of intangible assets. Be careful though when doing this. Some companies, such as tech companies, are built on intellectual property and so have a lot of intangible assets. Book value wouldn't be a good metric for measuring them.
Furthermore, think about the assets the company holds; just because it's a physical asset doesn't mean that it's liquid. Have you ever tried to sell an outdated automobile factory in Gary, IN? Another thing with assts, pay attention to the quality of the asset(s). Look at the housing and banking sectors. They still can't bring themselves to properly impair bad loans and distressed land.
I refuse to buy the stock on my faith in the Goldman franchise alone, so why should I buy? I should only add to my holdings if I believe that the government will do whatever it takes to keep the bank afloat and I can stomach another 50% haircut.
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