/biz/ - Business & Finance

Well, everyone. I'm reporting back. You made fun of me then. Well, who's laughing now?

Last April, I articulated here a simple principle that I learned from reading The Intelligent Investor. The most important factor in determining investment returns is to buy stocks with as low a PE ratio as possible. This is called the earnings yield. A stock with a PE ratio of 25 will only return a yield of 4%, whereas a stock with a PE ratio or 1 will return a yield of 100%, i.e., it will double in value every year.

"But those low PE ratios are the markets vote against the companies future earnings!" "Those low PE ratios are a value trap!" I was met with these and other such banal blatherings. So I decided to scientifically test my theory with. In a paper portfolio (so you don't sabotage my real trades), I purchased $100,000 worth of various issues, with the principal that these must have a very low PE ratio. The stocks were purchased on 4/13.

Approaching 10 months later, enough time has elapsed that we can draw some conclusions from the results. As you see, the portfolio was wildly successful, and after less than a year is worth nearly 315% the original amount. The bottom line is that investing is not hard as long as we stick to the fundamental principles. Look at the stocks PE ratio. If it's low, then buy it. If it's high, then pass. Always buy with a margin of safety (a low PE ratio). The other "fundamentals," the charts, etc. are just noise.