My first criteria for selecting a stock is actually based on a very simple tool. Note very simple and i do not need to use some wierd mumbo-jumbo analytical tool some bank is touting to be able to improve your batting average. Total BS if you ask me, At the rate Im picking stocks faster and better than most of your analysts, i think i will pass.
Now what is the tool? Simply it is just the Price/ earnings (PE) ratio. what is this and why is this important let me explain.
Price is what you pay for a stock right? Earnings of course is how much the company earns. So if the price is low and the earnings high, is it a good thing? ( PS the answer is yes! because it shows that you are in essence buying an undervalued stock) if the PE is high, then yea you are buying an over valued stock or at best fair valued,
Now if you are smart enough you would probably ask, what is 'High PE' and what is 'Low PE'? Good question, and the answer is this, it depends, you can compare it to the industry average of KLSE average ( 12) and either way you are not wrong.
I am a risk averse person and i always choose PE that is at least <10. the lower the freaking better because i increase my margin of safety.
Anything that is above 10, i normally would take a pass on it.
A caveat though, a low PE does not mean sure profit, but a high PE can guarantee you a loss.
I use low PE only as my preliminary selection and not the full monty just yet. You will see soon enough why i say that.
Next post i will post what i have bought and why low PE plays an important factor in it.
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