I’m often told that we who write about investments are too “technical.” The criticism is levied at practitioners of fundamental analysis as well as technical analysis, so it’s safe to assume that in this context, it means we use too much industry jargon. In particular, readers wonder at the emphasis we put on “P/E ratios,” and wonder why it is that the same P/E ratio that is “good” for one stock may be “bad” for another. So let’s go back to the beginning. What is P/E? Stocks are priced in individual shares, so when value analysts compare price to earnings, we first divide the total earnings of the company by the number of outstanding shares to get the Earnings Per Share (or EPS). P/E is the price of stock divided by the EPS. Why do that? Well, the result tells you how many years it would take the company, earning at its current rate, to equal your investment—to “pay you back,” if your share of the profits went directly to you. (They don’t, but they go into the value of the company, so the principle is sound.)
Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.