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An Obsession That Will Hurt Your Stock Market Results

Guest post by: Gary Kerkow

Article Overview: Some traders and investors use price-earnings ratios as their basic measurement tool when deciding if a stock is undervalued, and worth buying. This is not a sound way to make a trading decision. Learn how the world's best traders and investors make fortunes.

An Obsession That Will Hurt Your Stock Market Results

What is the price-earnings ratio?



The price-earnings ratio is a valuation ratio of a company's current share price compared to its per-share earnings. As an example, if a company is currently trading at $40.00 per share, and earnings over the last year were $2.00 per share, the price-earnings ratio would be 20. In other words, it would be 40 divided by 2 which equals 20.

The faulty obsession with the price-earnings ratio



Some traders and investors use price-earnings ratios as their basic measurement tool when deciding if a stock is undervalued, and worth buying. This is not a sound way to make a trading decision. Usually a low price-earnings is down in the dumps, because the company's past record is really bad. This indicates earnings, sales, and other important factors are inferior. Do you really want to buy stock in a company that is doing terrible? Your stock market results will not be good.

Go with the trend



I always find it amazing when I see Wall Street analysts, television personalities, and others, getting excited because a stock is selling near the bottom of its historical price-earnings range. Stocks that are going down in price, tend to keep going down in price. This is called a trend. Going against important trends when trading is like trying to swim against the current of a river. It is much easier to go with the flow. It is the same in trading. You will be more successful when you trade with the trend.

Price-earnings ratio not a relevant factor



If, over the last several decades, you conduct an analysis of the best performing stocks, it will be clear that price-earnings ratios were not a relevant factor. It has virtually nothing to do with price movement, or whether a stock should be bought or sold. Your primary factor should be whether the rate of change concerning earnings, is increasing or decreasing in a big way. Earnings are a crucial factor that will directly affect your stock market results.

Do not miss out on the best performing stocks



If you decide not to acquire stocks that are sound fundamentally, and technically, but have a so-called high price-earnings ratio, you instantly eliminate yourself from many of the stocks with the best potential. You would have missed out on fantastic stocks such as Google, Apple, and Intuitive Surgical. You would have also missed out on great performing stocks of the past, such as Microsoft, Cisco, and Yahoo.

Technical analysis is the key to trading success



Those who say you should buy stocks only for the long run, or tell you they buy stocks to hold forever, are the epitome of trading ignorance. Do not concentrate on irrelevant information such as a price-earnings ratio. Focus on price and volume analysis, along with important fundamentals such as earnings, sales, and return on equity. This will improve your stock market results.

Enron went from $90.00 per share in August of 2000, to bankruptcy in December of 2001. Cisco was $80.00 per share in March of 2000. It now, after over 11 years, trades for under $18.00. Lucent was over $77.00 in December of 1999. By October of 2002, the stock was down to 55 cents. Do you really want to hold on to stocks like this, as they plummet in price? It makes no sense to do so. Most of the stocks that lose over 80% of their value never make it back to their high price peak.

Traders and investors who are proficient in technical analysis made an enormous amount of money trading Enron, Cisco, Microsoft and Lucent. This is because they bought at the right time, and more importantly, sold when the chart told them to do so. Proper price and volume analysis is the key to making a fortune trading the various markets. I highly recommend you learn this important skill. It will help you in a big way, on your quest for great stock market results.

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Article Tags: priceearnings ratios, stock market results, trading



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