MAKER'S OF MODERN TRADER!


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     TRADING SYSTEM
 
 
   WELCOME || TRADING SYSTEM || TRADING SIGNAL || PSYCHOLOGY || PORTOFOLIO SIZE || TRADING PHASE ||
    STOCK PICK HISTORY || INVESTMENT BASIC || WEIGHTAGE ALLOCATION || GOLDEN RULE || PE MYTH
 
MAKER'S OF MODERN TRADER

PE MYTH OF INVESTING:-

There is no linkage of market P/Es {Market Price/ Earning per Share} to subsequent returns--no matter how you measure the ratio and no matter over how long (up to five years) you measure returns.

Every Fundamental Analyest, Financial expert newspaper, magazine and stock report, publishes key financial ratio called P/E ratios,they seems to talk about them and interpretpresent and future of the companey when they're discussing stocks. So P/E ratios must be a great way to compare stocks Right? Wrong ? No Comment!

If you were told by these so called expert that fly-by-night Industries had a P/E of 7, and that Reliance Industries. had a P/E of 14, would you buy fly-by-night Industries instead of Reliance Industries? You might, but you wouldn't be comfortable making that decision. Why? Because you need more information. You'd like to know a whole lot of things before you decide which stock to buy on Fundamental information of financial ratio. One of the most important things that you would like to know is the worth of each stock based upon its earnings, profitability and other key financial data. In other words, you'd like to have a sense of the stocks intrinsic value. P/E ratios don't tell anything about the stock value!

By looking at the average price/earnings leve, Can any you predict which way the market is headed ? Some investors think that you can--or at least, that you are likely to do well buying when the ratio is low and selling when it is high. However, recent research has evidence to the contrary. The P/E level is useless for market timing.

Why do we so believe P/E predicts the future? We believe, wrongly, that the supply and demand for securities follow the same curves as the supply and demand for Commodaties. ("We would buy more of anything if it were cheap.") The truth is that demand for stocks is not in some neat inverse relationship to the price. On the contrary: It's when stocks are already high (as in 1999) that buys orders flood into high profile investors and the volume of stocks shoots up.

There's an emotional component to the belief that buying into low-P/E markets leads to success. When we buy "cheap" and are rewarded with rising prices, we feel smart and deserving of the capital gain. The fellow next door who paid up looks like a gambler and not deserving of a reward. Perhaps investors fear high-P/E markets because of instinct. But that fear of heights shouldn't dictate your willingness to hold equities. The thesis that stocks should be sold when P/Es are high is wrongheaded, for two reasons. First, the data don't support the thesis. Second, finance theory denies it.

Analysis shows that there is no linkage of market P/Es to subsequent returns in the market. For every instance in which high-P/E markets do badly or well, however determined, there is an almost identical number and magnitude of times they did the reverse. Low-P/E markets lead to bad results as often as good ones.

If you make P/E trigger you want--buy when it's below 20 and sell when it's above, or buy below 8 and sell above, whatever--and you won't wind up with a trading rule that works. Vastly more often than not, you'll wind up with a return that badly lags buying and holding. Why? You'll be out of the market for crucial rallies, and you will not be spared all of the corrections. With a trigger of 25, for example, you'd be out of the market in 1922 (when the market was up 28%) and in the market during all but four of every moneylosing year ever. P/E triggers don't always work.

Its timing and timing with the art of technical analysis can help you out to enter and exit of the market for crucial rallies.

Choice is yours!

Happy Investing!