Power Raid
We Exist To Win Premierships
It is definitely a thing. Whether it is useful or not is really dependent upon your own preferences.
It's a good guide to limit the downside risk. Eg. buy at P/E of 10 and profits halve the following year, you've still got a 5% return, buy at P/E 40 and profits down 10% and you've got only 2.25%.*
In essence, anything over 20-odd you're expecting a significant change in the profit for the company, they become speculative.
I like it because I don't like losing money and high P/E ratios are a good way to lose money quickly if things turn bad (if you invest $1k, and lose 50%, you need to get 100% return on the remainder to break even. Much rather just tick along at 7-10% if possible).
The academic literature show (with obviously some issues surrounding the delisting of companies) that low P/E ratio companies perform better, on a risk/return basis.
*Return is based not on the change in market value, but rather the return your portion of ownership in the company generated.
yep
people often factor in future growth but anyone in business will tell you that growth always takes longer and costs more than predicted. 95% of what I buy is growth stocks and hold for 3-8 years.
The returns have been `35% pa between 97 and 2007 and 65% plus pa post 2007. Meaning the risk is worth it but only if you can directly influence management as a small stuff up can really hurt as you highlight.