35 responses

  1. Money Reasons
    January 30, 2011

    I had Netflix when they first went public, it double for me and I jumped out… HUGE mistake on my part!

    I like to use the “Forward P/E” just to get an idea of the expected growth of the company too. I was in BIDU and after it went up huge for me, I temporarily jumped out because the P/E ratio was giving me a nosebleed.

    Netflix is too rich for my blood today… If NFLX has a big fall in stock price, I might take a second look though!

    • moneycone
      January 30, 2011

      I bought Baidu right after the split. Sold it when it peaked at $110. Purely speculation – I don’t long term interest in Baidu.

      Netflix is too expensive for my taste! Buying Netflix when it went public – that’s a pretty good call! Hope you didn’t sell it soon after and managed to cash a good profit!

      • Money Reasons
        February 3, 2011

        That split was nice, it really made the price of the stock increase. I’m playing with the houses money with this one, so anything goes :)

        I got back into before earnings, and then jumped out… I’m a little reckless with this one, but I already have my initial investment out…

  2. DIY Investor
    January 30, 2011

    Great Post. Good point on Buffett.

    • moneycone
      January 30, 2011

      Buffett was stubborn and he was right!

  3. 101 Centavos
    January 30, 2011

    Price to earnings is a good metric. I like price to sales and price to book as well. When Buffett talks, people should listen!

    • moneycone
      February 1, 2011

      The thing I like most about Buffett is that he is very humble. He always admitted his mistakes and never claimed to be a know-it-all. His letters to shareholders are a pleasure to read!

  4. BeatingTheIndex
    January 30, 2011

    Buffet simply proved that following the crowd is not always the most rewarding path. It helps to have an “investor’s instinct” to smell when a market got out of hand in terms of valuations!

    • moneycone
      January 30, 2011

      Good point! Buffett practised what he preached – be greedy when others are fearful and fearful when others are greedy.

  5. brokeprofessionals
    January 30, 2011

    I’ve heard its not always a perfect indicator (probably largely because the markets are not rational, which I will have to agree with having recently on my blog bought stocks based upon the advice of my dog) but thanks for explaining the P/E ratio in an in-depth and clear manner.

    • moneycone
      January 31, 2011

      Definitely! As you correctly point out markets are not rational (if it were, we wouldn’t have had the dot com bust!). But PEs help gauge what an investor’s expectation is from a company in terms of future earnings.

  6. LaTisha
    January 31, 2011

    I think Netflix is highly overvalued. It seems to be a bandwagon stock right now. It keeps pushing higher because everyone is jumping on. I bought when it was about 40 bucks and sold at 58. Guess I should have stayed in for the hype… Nice post, we did one on ratios as well at http://www.fsyaonline.com/2011/01/time-to-get-technical-part-2.html

    • moneycone
      January 31, 2011

      Netflix has long been in the speculators territory

  7. Buck Inspire
    February 1, 2011

    Thanks for the clear breakdown on PE ratios! :) Buffett still has it, nice play on Goldman a few years back when all hell was breaking loose. Good point about going against the crowd. Do you use the volatility index (VIX) with your trades? Could be an interesting post.

    • moneycone
      February 1, 2011

      VIX tells me when to accumulate!

      • Buck Inspire
        February 3, 2011

        Nice. By the way, the new look of your site is great! :) What prompted the change?

      • MoneyCone
        February 3, 2011

        Glad you noticed, Buck :-) ! Wanted a cleaner look and decided a face lift was in order!

  8. Squirrelers
    February 1, 2011

    Good overview of P/E ratios. I recall doing such calculations and analysis when I was getting an MBA, and learned how important this ratio is. Personally, I have evolved into more of an index fund investor of late, so I don’t really focus on this metric. Though it’s probably good to do so, as I think about it, in terms of the overall market basket.

    • moneycone
      February 1, 2011

      Indexing is a good strategy to follow. As long as you rebalance periodically, you should do just fine!

  9. Robert @ The College Investor
    February 2, 2011

    I also think its really important to note the Trailing P/E is usually a better gauge than Forward P/E. Forward is only based on what the company’s guidance is…which can be very wrong. I like to stick to facts.

    • moneycone
      February 2, 2011

      Right. And that’s how you see Apple’s PE at less than 15 on some sites!

  10. everyday tips
    February 2, 2011

    I rely more on the PEG ratio than the P/E actually, but I do use both. If only I had more money so I could research stocks more often!!!

    • MoneyCone
      February 3, 2011

      Some swear by PEG!

  11. Romeo
    February 2, 2011

    Wow, absolutely great. This basic information is missing from so many investors. In my opinion, they should all know about P/E Ratios prior to investing in stocks. As you have shown, there are many important and relating derivatives from this ratio.

    • MoneyCone
      February 3, 2011

      Thanks Romeo! Yes, it is a simple concept and historically it has worked in minimizing risk. Even though there are other metrics and one should consider them, an understanding of PE ratio is fundamental to investing.

  12. Jackie
    February 3, 2011

    Nice breakdown of P/E ratios. I keep feeling like I should base my stock-buying on something other than “pretty charts”, but that’s the only thing that seems to make sense to me.

    • MoneyCone
      February 3, 2011

      Who isn’t taken in by pretty charts! We are always on the look out for something more fancy!

  13. Jessica07
    February 3, 2011

    Great write-up. That was very helpful.

    • MoneyCone
      February 3, 2011

      Glad you liked it Jessica!

  14. Clay Ivy Finance
    February 4, 2011

    Glad to see someone quoting Ben and Warren. They have already shown us how it is done. It is up to us to follow their ways. P/E ratio is vital for understanding if a stock is reasonably priced.

    • moneycone
      February 8, 2011

      Very true!

  15. Graeme
    February 7, 2011

    I thinks its a mistake to over-emphasise any one ratio.

    In addition, the PE ratio has a lot of variants and you need to pick which one is appropriate: value investors would probably use historical or CAPE, growth investors might look many years forward.

    • moneycone
      February 8, 2011

      Sure Graeme. Having a good understanding helps you make an informed decision when selecting stocks.

  16. pattirose
    February 7, 2011

    What a fabulous post – thank you soooo much for explaining P/E in a way even I could understand.

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