| MYTH
#1: PRICE TO EARNINGS
RATIOS TELL YOU WHETHER
STOCKS ARE CHEAP OR
EXPENSIVE. |
 P/E
ratios are easy to find.
Just about every newspaper,
magazine and stock report
publishes P/E ratios. Everybody
seems to talk about them
when discussing stocks.
So P/E ratios must be a
great way to compare stocks.
Right? Wrong!
If you were told that Fly-By-Nite
Industries had a P/E of
7, and Fantastic Plastics
Inc. had a P/E of 14, would
you buy Fly-By-Nite Industries
instead of Fantastic Plastics
Inc.? You might, but you
wouldn’t be comfortable
making that decision. Why?
Because you need more information.
You’d like to know a whole
lot of things before you
decide which stock to buy.
One of the most important
things you’d like to know
is the worth of each stock
based upon its earnings,
profitability and other
key financial data. In other
words, you’d like to |
|
have a sense of the stock’s
intrinsic value. P/E ratios
don’t say anything about
a stock’s value!
What investors need is a
Value to Price ratio. With
a Value to Price ratio,
investors would know immediately
whether a stock was cheap,
expensive or fairly priced.
But this means we have to
have a way of computing
value. Of course there are
theories and formulas for
computing intrinsic value.
But they are complex, and
some sophisticated investors
even say they are unfathomable.
Consequently, most investors,
even the Pros, don’t begin
to look at stock’s intrinsic
value! They resort to trivial
devices like comparing P/E
ratios.
| MYTH
#2: YOU MUST ASSUME
HIGH RISKS TO MAKE
GOOD MONEY IN THE
STOCK MARKET. |
A
woman recently said to me,
"I’m just scared to death
of stocks. I can’t afford
to lose my hard earned money."
The perception of high risk
in stock investing is |
