My book, “Choose Stocks Wisely: A Formula That Produced Amazing Returns,” communicates in step-by-step fashion the usefulness of the balance sheet to finding a buying price on a common stock. As stated before, a share of stock is a share of company equity. Equity is found only on the balance sheet.

Also found only on the balance sheet are a company’s assets (resources) and its liabilities (obligations).  The excess of the assets over the liabilities is equal to the equity of the company. Since equity is equal to the residual after subtracting liabilities from assets, equity is also referred to as “net assets.”

The assets found on the balance sheet will include those of a tangible nature and may include some that are intangible; that is, they lack physical substance. Tangible assets possess physical substance and include assets such as cash or buildings or land, etc. Intangible assets may include resources like patents, copyrights, etc. One unique kind of intangible is called goodwill. The important thing to note is that intangible assets have no physical substance and therefore it’s very difficult to put a value on these resources.

My practice is to disregard the intangible assets completely when I’m trying to value what I’m willing to pay for a share of stock (a share of company equity). That is, I’m assuming they have no worth. This is conservative but I want to be very conservative when I buy stock; I want to buy really low.

Well, if equity is the residual after subtracting liabilities from assets, and equity is also referred to as “net assets,” then we would describe the “net assets” as “tangible net assets” since I’m excluding the intangible assets altogether when I’m valuing a share of stock. The point of buying near tangible net asset value is that I want to get my full money’s worth of company equity when I invest. In other words, I don’t want to pay for something intangible I can’t value; I only want to pay for a share of the hard net assets of the company.

 Now, my practice does not mean that money can’t be lost on such an investment. I’ve lost money on stocks, even when the stock price was below the tangible net asset value of the shares at the time of my investments. However, I’ve limited my losses because I was buying stocks near a level of “hard” asset support. Further, my practice has opened me to other companies that far more than offset the losses such that my overall portfolio has outperformed the market significantly.

It is impossible to avoid losses altogether on stock investments. However, it is also true that gains can be substantial with stock investing. In my experience, the key to finding potential for gains to consistently outpace losses is to buy quality companies at bargain prices. Even when I’ve experienced loss with my buying method, I still know “why” I bought a stock and it’s never because “I just had a good feeling.”

There was a time years ago when I bought because the crowd thought the company was going to be the best thing since “sliced bread.” I did not do well in those days either. When I buy today, I use a measured approach that helps me know “why” I’m buying. Knowing why I’m buying makes any loss somehow less painful and gains more satisfying. My mantra is that the balance sheet is the only way for one to know “why” he or she believes a good company is low-priced.

Finally, I’m not advocating that anyone invest in individual stocks. I wrote my book to express my understanding of the essentiality of the balance sheet to buying stocks. My early failure with investing in stocks was centrally due to my failure to properly analyze a company’s balance sheet before buying stock in the company. My success came after I learned to properly use the balance sheet. In my book, I seek to explain how I go about my personal analysis of the balance sheet before buying stocks. It’s a bit more involved than addressed here, but I break it down again, step-by-step, in the book.