Investing for Beginners: 3 Books in 1: The Beginner's Guidebook to Investing + The Great Correction + Do What Warren Buffett Does: Learn the Basics of Investing, How to Create a Passive Income by Mark Gruner

Author:Mark Gruner [Gruner, Mark]
Language: eng
Format: mobi
Published: 2020-11-29T16:00:00+00:00

High P/E equals Low ROI

When you go over that, 100 does not make good sense at all. And most people will not accept 100. There is a difference when we talk about a market versus an individual company, as there could be a specific reason for a high P/E ratio with a company, but the same is not true for the whole market.. This is very important because the individual company could have a specific reason for having a huge P/E ratio. One of the easiest reasons is that their earnings in that year dropped down to close to zero that would create a large P/E ratio. And it might be the case that this was an anomaly and that this year's earnings, just abnormally low, in which case you should probably look at more likely earnings for that company, and then calculate the P/E ratio, not on the actual earnings, but the expected earnings. This is very important. This issue does not apply, when you're looking at a whole portfolio of 100 or 200 stocks. You might be asking yourself why should one issue affect one stock but not apply for 100 stocks or more. The reason for that is that each of the stocks in a group of 500 stocks will average each other. Some will have higher earnings and some lower earnings, but this will come to a general average which is more consistent.

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