Wouldn’t it be great if there were a single piece of information that would tell you everything you need to know about whether to buy or sell a stock? Yup… that sure would be great. Unfortunately, it doesn’t exist. However, there is one number that does a surprisingly good job of conveying a lot of information about almost every stock. It’s a number that can be used in many ways: on a stand-alone basis for comparing one stock to another or to evaluate entire markets. It’s the price-to-earnings ratio, usually called the P/E ratio or the P/E multiple or simply the PE (with or without the “/”).
“There’s no such thing as a free lunch.” We’ve all been warned about this many times, in many different situations, and for good reason. Whatever is being offered “for free” almost always involves a hidden cost or fee or imposes a future obligation, monetary or otherwise. We don’t expect to get something for nothing and should maintain a healthy suspicion about anyone who tries to convince us otherwise.
Unless you’re a day trader, you shouldn’t micromanage your investments or even check them on a daily basis. But on the flip side, investing is not a hands-off endeavor, either.
As I write, the stock market is having more rise and falls than a ship in a storm. Since the January 2018 stock market high of 26,616.71, the Dow Jones has lost 10% in value. Almost $2 trillion in value has disappeared into thin air. Ouch! The decline officially puts us in correction territory.
Venture capital is that level of investment that typically takes place before a company goes public. It’s a high-stakes game, involving both risk of massive losses — including the entire investment — as well as generating incredible returns.
Back in 1952, long before everyone and their mother could discuss the benefits of adopting a holistic approach to their personal health, economist Harry Markowitz introduced theory recommending a holistic approach to one’s financial health. Known as Modern Portfolio Theory (MPT), it’s just as popular today as it was back in 1990, when it won Markowitz a Nobel Prize.
One day, you fire up Google Finance to check on your favorite investment. Maybe it’s Netflix (NFLX). You see that the share price is up $2 or down $10. Maybe even both within a one-hour period. Why is that? Who decided that? You did. Well, you and a few million other people, including me.
Uber… Spotify… Airbnb… These companies offer super-popular services and could make great investments for your portfolio. But there’s just one problem: They haven’t had their IPOs yet. In fact, the entire IPO calendar for 2017 is unusually bare. Why is this?
There are many competing investment theories about how to find the “best” investments based on your time frame, risk tolerance and specific objectives. One approach, dating back at least to Benjamin Graham’s 1949 book, The Intelligent Investor, is to identify “undervalued stocks” that for one reason or another are selling at prices far below their underlying values.
Millions of people invest in stocks, but it’s likely that relatively few give much thought to what causes the stock market to rise and fall. Yes, selecting the right companies is critically important. But as the saying goes, Timing is everything. And that’s why it’s important to be aware of major factors that impact the stock market and to pay attention to changes in those areas to get a handle on where the market may be heading.