These are just a few of the thoughts that run through your head. You
are constantly being torn by the natural enemies of fear and greed, yet you
must hold your equilibrium to try to make dispassionate decisions. The first
law of trading is to protect your capital so that any single trade will not have
you going home broke.
First you must learn that you CAN time the market even though your
broker and all those “experts” will tell you that you can’t. There are
several good timing advisory services that you may subscribe to or you can
develop you own method.
Second, don’t believe all that horsewash about research. That is
Wall Street smoke and mirrors. Don’t try to pick individual stocks. Stick to
no-load mutual funds with a discount broker and buy only the best performing
funds during the past 6 and 12 months. When they quit being in the top 1%
sell them and find new ones that are going up.
Third,Don’t Buy Stocks based on P/E Ratio alone
When I purchase a stock, I note the current P/E ratio and chart it along with the price. Historically, P/E’s that move up 100%-200% or more while the stock is advancing, usually become vulnerable stocks and can start to become extended and flash sell signals. It holds true for a stock with a P/E starting at 15 and going to 40 or a stock with a P/E of 50 and going to 115. Don’t skip over EXCELLENT companies that are growing at amazing clips because of a high P/E ratio. What may seem high now, may be low later on! Earnings and Sales are much more important. Price and volume are the most important. The P/E ratio is just a secondary indicator that can be used to further analyze the stocks in your portfolio.
Always use price and volume as your first line of offense and defense. From this point, turn to some dependable secondary indicators to confirm your original analysis and then make a decision. I would never throw out a stock because its P/E ratio is too high. Take GOOG for example, every value investor missed the 100% gain that this stock boasted after the release of its IPO. Growth stocks are expensive for a reason, don’t forget the analogy to a Mercedes.