A:In looking for real value, you are trying to find a price-earnings (P/E) ratio that is about the same as the expected rate of growth in earnings. It’s called the PEG ratio, or the PE-to-growth-rate ratio. You want a PE-to-growth rate that is one or less. “What identifies a ‘real value’ is that relationship between the expected growth rate of the company and the P/E ratio,” says Alexander Colby, a chartered financial analyst with Beacon Fiduciary Advisors in Chestnut Hill, Massachusetts. “If I can buy this [stock] with a P/E ratio of one times the growth rate or less, that’s good value to me, and the growth rate will take care of [me] over time.”
Q: IS BUYING LOW THE MOST IMPORTANT ELEMENT OF INVESTING?
A: Rather than buying low, the goal of investing should be to identify a company with a sustainable advantage, so that, over time, whether you buy at a low point or sell at a high point isn’t so critical.
“The real success is not so much trying to buy at the low or sell at the high, but rather to identify a sustainable advantage or sustainable excellence — and that way, the growth of earnings over time bails you out,” Colby says.