A Quote by Benjamin Graham
Calculate a stock's price/earnings ratio yourself, using Graham's formula of current price divided by average earnings over the past three years.
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It's nonsensical to derive a price/earnings ratio by dividing the known current price by unknown future earnings.
If you can follow only one bit of data, follow the earnings - assuming the company in question has earnings. I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction.
What we do is we test what works on Wall Street. And sometimes it is earnings momentum, and sometimes it's earnings surprises. Sometimes it's price-to-sales cash flow, and then we put together our stock selection models.
I buy stocks when they are battered. I am strict with my discipline. I always buy stocks with low price-earnings ratios, low price-to-book value ratios and higher-than-average yield. Academic studies have shown that a strategy of buying out-of-favor stocks with low P/E, price-to-book and price-to-cash flow ratios outperforms the market pretty consistently over long periods of time.
Edge also implies what Ben Graham....called a margin of safety. You have a margin of safety when you buy an asset at a price that is substantially less than its value. As Graham noted, the margin of safety 'is available for absorbing the effect of miscalculations or worse than average luck.' ...Graham expands, "The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price."
Are you going to divest in the banks and pension funds? Plenty of people are willing to invest in stock of those companies. You can argue that when a lot of people divest, it makes the stock price artificially low, which makes their price-to-earnings ratio more favorable, which makes it a better investment for the people who don't give a damn - - and is it really going to change corporate behavior? It begins to create a climate of antagonistic opinion, the result might be that the corporate executives will retreat even more into their own selfjustifying narratives.
To know whether stocks are cheap or pricey, we typically look at price-to-earnings ratio. Valuation is a tougher question than many folks realize.
Approaches to determining stock values vary, but fundamentally, each company judging itself undervalued is saying that its future stream of earnings justifies a higher price than the stock market is willing to accord it.
Of all the big Internet companies, Yahoo is the most highly valued on a price-earnings and price-sales basis.
Going public today is fraught with peril on many levels. One is earnings guidance. If you miss guidance, the stock price becomes very volatile. Short sellers can put a tremendous downward pressure on the stock.
The only way an established enterprise can dramatically increase its stock price is by adding a net new high-growth earnings engine to its existing portfolio.
Today's stock market actually hates technology, as shown by all-time low price/earnings ratios for major public technology companies
Today's stock market actually hates technology, as shown by all-time low price/earnings ratios for major public technology companies.
The big picture is: the main thing you should be concerned about in the future are incremental returns on capital going forward. As it turns out, past history of a good return on capital is a good proxy for this but obviously not foolproof. I think this is an area where thoughtful analysis can add value to any simple ranking/screening strategy such as the magic formula. When doing in depth analysis of companies, I care very much about long term earnings power, not necessarily so much about the volatility of that earnings power but about my certainty of "normal" earnings power over time.
Real investment risk is measured not by the percent that a stock may decline in price in relation to the general market in a given period, but by the danger of a loss of quality and earnings power through economic changes or deterioration in management.
People forget that although we can pinpoint the price, we can only guess at future earnings. The past isn't much help: It simply tells whether a market was pricey or cheap.
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