In theory, every investor wants to buy low. We all understand bargains,
and we all prefer buying products on sale rather than at full price. But
buying low and selling high isn’t as easy as it sounds, because buying low
often means diving in while everyone else scrambles to get out of the water.
After all, they wouldn’t all be leaving unless someone had seen a shark,
would they?
The buy low, sell high strategy works better if you focus not on the
market, but on a specific stock. If you can determine on your own whether a
stock is cheap, you can muster up the fortitude to buy it regardless of the
state of the broader market.
Study after study has shown that stocks with low valuations tend to
outperform. With those decades of research in mind, here are some
valuation ratios to consider:
Price/earnings ratio.
Price/sales ratio.
Price/book ratio.
Price/operating cash flow ratio.
While investors can calculate dozens of valuation ratios, the four listed
above require statistics anyone can gather at no cost, and all four can help
you assess a stock’s value. The paragraphs that follow and Table 4.1
illustrate all of these ratios for Pfizer, the pharmaceutical titan. To get
started, prepare a spreadsheet or printed page similar to the table to keep
all the data in one place. You can access all the numbers you need from a
free website such as Yahoo! Finance.
Valuation: Buy Low, Sell High.
