One question that prospective investors ask us often is the following: Is there a magic criteria or formula to pick up stocks? Some people will tell you that looking at Price to earnings ratio could be it. However, price to earnings ratio by itself can be extremely misleading. Most companies with low price to earnings have a low for a good reason and are not good investments. As a general rule, you should never base an investment decision on one factor but instead you need to take into account a multitude of variables. This is true for stocks picking but the same logic applies to any other types of investments. To put this into perspective, let say you are travelling in a foreign country and you suddenly see a house for sale that you instantly fall in you love with. Your first reaction will certainly be to ask how much this house is on the market for. Assuming that in your country of residence the property market is expensive, let say that you live and work in the UK for instance. If you find out that this house that you love is for sale for let say 100k pounds....for the same price in London you hardly get a parking space... but does it mean that this is a good investment? Maybe it is maybe it is not. Only looking at the price will not give you more information here than letting you know if you can afford it or not.
Comments