How to Select investments – Pin or PE Ratio? Investors who buy shares, often use the price/earnings ratio as a measure of selection. Using the PE ratio you can decide whether the price relative to earnings makes a share an attractive proposition.
To calculate the PE ratio you divide the share price by the earnings per share, a low PE ratio may indicate that buying that particular share is good value, whereas a high PE ratio might suggest otherwise.
Because the PE ratio is calculated using only one year’s trading performance, just using PE as a measure of determination for investing can be flawed.
The late Jim Slater thought so, as he devised an improvement on PE, a PEG ratio.
The PEG ratio (price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company’s expected growth.
Even the PEG ratio can be erroneous if followed by the book and not taking other factors into account, as Jim Slater informed readers of the Telegraph, as he would also consider a company’s ability to generate cash together with PEG.
If you are a devotee of buying shares in individual companies then this will be “grist to the Mill” for you no doubt.
For normal investors who prefer the safety and diversity of collective investments, consideration of PE or PEG is rather ambivalent.
So are there any methods that will improve the chances of success for investors in collective investments that are relatively simple.
There are four simple systems available that I am aware of:-
Buying investments from non-advisory investment sites that have lists of popular investments, this is a bit unscientific, but generally, these sites provide investors with the “feel good” factor and make them feel secure as they are investing with many others, so the herd instinct comes into play.
The PIN method, this involves using a pin and blindly selecting your investments (often referred to as the Random Walk). This was initiated many years ago at the annual Wall Street festive celebrations for investment professionals and their families. Their children would throw darts at copies of the pages of Wall Street News with shares listed on them. To the embarrassment of the investment professionals when the results of these random PIN selections were compared with the results from the professional stock brokers at the following year’s bash, they often outperformed them. There’s a surprise!
There was a gentleman named Schiller who wrote a book called “Irrational Exuberance” who devised a ten year adjusted PE ratio known as the Cape Ratio. This is a very useful and easy to understand the system of finding where the best value is around the globe and avoiding stock markets offering poor value. This system although not infallible provides very useful indicators, indeed this indicator has thrown up a very useful and good value area for our clients to invest for 2017. We are making changes to our model portfolios now to accommodate this.
The other choice is to find an IFA to provide investment advice. You may be concerned about fees or charges but a recent feature article in Shares magazine (December 2016) has shown that clients of IFA’s often achieve 1.59% out-performance compared to clients who proceed without the benefit of an IFA.
If you choose an adviser well they will provide advice not only on investments but also on your other financial arrangements. There are some things that are more important than your investments, such as passing your wealth down the generations as tax efficiently as possible.
Because it’s New Year, I want to help more clients understand investing, so I am opening my interactive workshop “Worry – Free Investing” to a limited number of potential new clients. If you want to create a clear vision of a more profitable investing future, without stress, then telephone Marie on 01189 347 920. A profitable investment portfolio will assist you to maintain or improve your lifestyle.
Surely better than a PIN?