Top 5 Stock Entry Decisions: #4 - P/E
Ever watch Shark Tank? If so, you’ll notice one of the most frequently considered factors by the sharks is the company’s valuation compared to its net income.
Sharks, all successful investors themselves, generally only invest in companies valued at < 10 P/E. Why is this?
Well, P/E is a good measure of how long it will take to recoup your investment. Some companies trade at ridiculously high P/Es, some even exceeding 100. This means that if the company’s net earnings stay consistent, it will take 100 years before you recoup your investment via net income.
When considering P/E from this perspective, you can easily see why it is wise to only invest in companies with very low P/Es. Many traders ignore P/E and end up throwing their money away on significantly overvalued companies that have a high likelihood to experience a price correction in the near future.
More to come over the next few days….