Berkshire Hathaway Inc. (BRK-B), Annaly Capital Management, Inc. (NLY): How to Buy Stock Without Losing Your Shirt

Finding the most attractive stock in a given industry
Book value is just one way to estimate true intrinsic value, and just because a stock trades at or below book value doesn’t prevent it from suffering losses. Plenty of stocks trade well below book value, with infamous insurance giant American International Group Inc (NYSE:AIG) being a particularly good example. Even after its recent rebound in light of its refocusing its business on its core insurance unit and selling off non-core assets, AIG still trades at just two-thirds of its book value. One risk with book value is that if the value of underlying assets doesn’t match up with what’s on a company’s books, then valuations based on book value will be inherently misleading.

In general, though, you can compare book values across companies within the same industry to get a sense of which stocks have the highest valuations. If factors like outstanding growth or promising future earnings prospects are present, then higher valuations might well be justified. But if the difference is due only to investor popularity or other irrational reasons, then choosing the more reasonably priced stock is the best way to minimize losses if a downturn happens.

Don’t ignore value
In deciding how to buy stock as safely as possible, be sure to pay attention to valuation. With stock markets at record highs, getting the right stock at the right price is more important than ever. It takes discipline to wait to find the most attractive stocks available, but if you succeed, then the value-investing model of buying stocks below intrinsic value will serve you well in the long run.

The article How to Buy Stock Without Losing Your Shirt originally appeared on Fool.com.

Fool contributor Dan Caplinger owns shares of Berkshire Hathaway and warrants on AIG. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends AIG and Berkshire Hathaway. The Motley Fool owns shares of AIG and Berkshire Hathaway and has the following options: Long Jan 2014 $25 Calls on AIG.

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