People get incredibly valuable fundamental information from their jobs that may not reach the professionals for months or even years. It’s better to miss the first move in a stock and wait to see if a company’s plans are working out. Look for small companies that are already profitable and have proven that their concept can be replicated.īe suspicious of companies with growth rates of 50 to 100 percent a year.ĭistrust diversifications, which usually turn out to be diworseifications. (“It is really going up!” doesn’t count.)īy putting your stocks into categories you’ll have a better idea of what to expect from them.īig companies have small moves, small companies have big moves.Ĭonsider the size of a company if you expect it to profit from a specific product. Understand the nature of the companies you own and the specific reasons for holding the stock. With few exceptions, an extremely high p/e ratio is a handicap to a stock, in the same way that extra weight in the saddle is a handicap to a racehorse.Ī company with a high p/e must have incredible earnings growth to justify the high price that’s been put on the stock. You’ll save yourself a lot of grief and a lot of money if you do.

If you remember nothing else about p/e ratios, remember to avoid socks with excessively high ones.

If you buy Coca-Cola, for instance, it’s useful to know whether what you’re paying for the earnings is in line with what others have paid for the earnings in the past. P/E level tend to be lowest for the slow growers and highest for the fast growersįirst step could be to look at P/E ratios of various stocks you own or looking to own are low, high, or average, relative to the industry norms.īefore you buy a stock, you might want to track it’s p/e ratio back through several years to get a sense of its normal levels. A ratio of 10 means the original investment will be earned back in ten years.

Useful measure of whether any stock is overpriced, fairly priced, or underpriced relative to a company's money-making potential.Ĭalculated as Current Price / Earnings per share for the prior 12 months or fiscal yearĬan be thought of the number of years it will take the company to earn back the amount of your initial investment. Relationship between the stock price and the earnings of the company.

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