Sound Advice

  Stock Valuations 101 Although there may be gurus who hearken to the influence of the Zodiac or lunar cycles, the valuations of most stocks are based on what's known as the price-earnings ratio.  In simple terms, that's the price of one share divided by the earnings per share.  The latter is the amount of earnings for the company as whole divided by the number of shares outstanding. The price-earnings ratio depends on several key factors.   Perhaps of greatest importance is the company's rate of growth. The rule of thumb is that the faster the rate of growth, the higher the price-earnings ratio, but there's a limit to what would be considered reasonable.   A typical range of price-earnings ratios is between 10 and 20 times. That's true of both individual stocks and the stock market as a whole.   Larger, more mature companies will probably grow more slowly while some small companies might well increase their profits more rapidly. There are caveats.   In a pe

It's All Relative Two of the questions I hear regularly are "When to buy?" and "When to sell?" Those kinds of inquiries suggest that there's an absolute level at which a security is worth adding to one's portfolio as well as a price when it's time to say adios. It would be nice to think that the process could be that tidy, but it's not. For starters, it's essential to understand that the word "absolute" is meaningless in the world of investing. The market is never "too high" or "too low". Wherever it is at any given moment is where investors think it should be. What's more, from the perspective of those who think in terms of absolutes, the averages have often stayed well below and well above what one might think of as a normal level for extended periods, sometimes years. So efforts to evaluate in this way usually prove to be a waste of time. Short-term market movements are never predictable and anyone

Dow 100,000 In 1999, James K. Glassman, a syndicated columnist, and Kevin A. Hassett, an economist, published a book entitled Dow 36,000: The New Strategy For Profiting From The Coming Rise in the Stock Market .   The authors’ thesis was that stocks were significantly undervalued.   What’s more, they projected a quadrupling of the Dow Jones Industrial Average within three to five years: 2002 to 2004. They couldn’t have been more wrong.   The Dow index peaked just above 11,700 in early 2000, then dropped below 7,700 in September 2002, just prior to the time Glassman and Hassett had forecast their 36,000 target. In 2007, the Dow climbed back to 14,000, then plunged in half by March, 2009.   What went wrong? The authors’ argued that investors viewed dividends from stocks as significantly riskier than they should have.   Based upon a reduced risk view of dividends, they suggested that valuations should be based on a multiple about six times the historical rate of 15-18 times earn

Inflation Worries Inflation has not been a persistent and serious threat to the economy since the 1970s and early 1980s.  The Fed knows how to defeat inflation.  Raise interest rates to onerous levels and quash demand in the economy via a serious recession.  In turn, companies lose the ability to rapidly boost prices, and employees no longer have the leverage to demand outsized wage hikes. We don’t want to repeat that cycle. At a minimum, however, we are starting to see upward pressure on prices.  How long might this last?  The Consumer Price Index jumped 5.0% in May, from the year-earlier level.  Remove food and energy, and so-called core inflation surged 3.8%. Fed officials continue to insist any increase will be “transitory,” their word of choice in describing what they see as a temporary rise in prices tied to the reopening of the economy.  That may be the case for hotels and airlines ready to see a jump in summer bookings.  But there are issues that are influencing pricing