Someone once asked asked Phil Town what the minimum BVPS would be to consider investing in a company.
Phil Town said that there is no minimum book value per share for a couple of reasons.
First, the value of looking at book value per share is amplified by knowing how many shares are out there. What we really care about is the total value of the business. We talk about that book value in “per share” prices, but that’s just convenient and useful because we almost always buy pieces of an investment instead of the whole thing (even though we think of it as buying the whole thing). Seeing the investment in terms of its smallest piece makes it easier for us to figure out what our particular pieces are worth.
Considering book value or equity (not “per share”), the second reason we don’t have an absolute minimum is that the key to good Rule #1 investing is buying a wonderful investment at an attractive price — and wonderful businesses can, for a very small investor, be very small or very large.
The key is knowing you’ve got the 4 M’s. We can buy all of a laundry business with a book value of $10,000 and Sticker Price of $50,000, or we can buy pieces of Exxon. This is the beauty of learning The Rule. It applies equally to purchasing a small laundromat or a piece of Exxon. And it’s so simple: Wonderful business, attractive price.
Now, having learned all that, you should know the difference between large or small public businesses (businesses that have registered with the SEC to trade pieces of the business in stock markets) and small private businesses as it relates to the stock market is primarily liquidity.
What liquidity measures is your ability to get in or out quickly. Little investors tend to have greater liquidity in public businesses than big investors do. We use that to our advantage with the arrows. If a business is trading at least 1 million shares a day and is priced at $2 or more per share, there is enough liquidity for Rule #1 investors to invest.
Obviously, the $50,000 laundry would probably not meet the liquidity requirement. That means that if you buy it, you may not be able to find a buyer to sell it to in some convenient time period. That makes for more risk, unless you really got a great deal, right? The liquidity of public investments is a strong advantage.