What is Smart Investing and the 60 PE Ratio Rule?
Smart investing is a strategy for investing in stocks that can help maximize returns and minimize risks. The 60 PE Ratio Rule is a popular strategy used by many successful investors. This rule states that a company’s stock should not be purchased if its price-to-earnings ratio (PE) is above 60. The PE ratio is a measure of how expensive a company’s stock is relative to its earnings-per-share (EPS). A company’s PE ratio is calculated by dividing its stock price by its EPS.
Why the 60 PE Ratio Rule?
The 60 PE Ratio Rule is a conservative approach to investing in stocks. It is based on the idea that a stock is too expensive if its PE ratio is greater than 60. This means that investors should be wary of buying a stock with a high PE ratio, as it may not be a good long-term investment. Furthermore, stocks with high PE ratios may be more volatile and more prone to large swings in their share prices.
How to Calculate the PE Ratio for a Stock
Calculating the PE ratio for a stock is relatively simple. The formula is as follows: PE Ratio = Stock Price / Earnings per Share. For example, if a stock is currently trading at $50 and its EPS is $2, then its PE ratio is 25 (50/2=25). If the stock’s PE ratio is greater than 60, then the stock is considered too expensive.
What to Consider When Using the 60 PE Ratio Rule
When using the 60 PE Ratio Rule, it is important to consider the industry in which the company operates. Different industries have different norms when it comes to PE ratios. For example, some technology companies may have higher PE ratios than other industries. Furthermore, it is also important to consider the company’s growth potential. Companies with strong growth potential may be able to justify higher PE ratios than companies without such potential.
Conclusion
Smart investing using the 60 PE Ratio Rule is a popular strategy that can help investors maximize returns and minimize risks. It is important to consider the industry in which a company operates and its growth potential when using this rule. For more information about smart investing, you can visit Investopedia.