The P/E ratio isn’t some magic figure that finds undervalued companies which somehow everyone else but you is sleeping on. This is how you can fill in the gaps.
Great overview of the common mistakes we make when using P/E ratio!
I will be honest, i have myself made some of these mistakes, and it is not my favorite indicator.
I prefer looking for companies growing top and bottom line, with attractive margins, generating strong cash flows, and financially solid. I then time my entry using technical indicator for attractive risk-reward. Regardless of what the P/E ratio might be!
Really great point. I have just started reading Morgan Housel's latest book, and he has this anecdote where Warren Buffett and a friend are talking about how bad the economy was in 2008.
Friend: "the economy is so bad, do you think it will come back?"
Buffett: "what was the most popular candy brand in 1962? Snickers"
Friend: ...?
Buffett: "what's the most popular brand now? Snickers"
Point being: high-quality, strong-margin, cash-rich companies are a great bet!
So what do you use as an initial filter when researching stocks?
Earnings and revenue growth > 5%, positive FCF yield, ROIC and Operating margin >10%. I also look at debt-to-equity ratio and current ratio. I will share my full long-term investing process next year as I roll out new features in my newsletter!
Great overview of the common mistakes we make when using P/E ratio!
I will be honest, i have myself made some of these mistakes, and it is not my favorite indicator.
I prefer looking for companies growing top and bottom line, with attractive margins, generating strong cash flows, and financially solid. I then time my entry using technical indicator for attractive risk-reward. Regardless of what the P/E ratio might be!
Really great point. I have just started reading Morgan Housel's latest book, and he has this anecdote where Warren Buffett and a friend are talking about how bad the economy was in 2008.
Friend: "the economy is so bad, do you think it will come back?"
Buffett: "what was the most popular candy brand in 1962? Snickers"
Friend: ...?
Buffett: "what's the most popular brand now? Snickers"
Point being: high-quality, strong-margin, cash-rich companies are a great bet!
So what do you use as an initial filter when researching stocks?
Earnings and revenue growth > 5%, positive FCF yield, ROIC and Operating margin >10%. I also look at debt-to-equity ratio and current ratio. I will share my full long-term investing process next year as I roll out new features in my newsletter!
Looking forward to that!