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Considering the stock market is down these days I want to invest money in mainly Large-Cap Stocks and hold them for the long-term. I was originally looking at P/E ratios being lower than average, but I feel like I may be missing part of the picture.

I know this question is somewhat naive, but are there any things to look for in order to find some 'on-sale' stocks to hold for long-term?

  • Obligatory Will Rogers quote: "Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it." – Pete Becker Jan 31 '16 at 11:40
  • Haha, excellent quote, yes, I've not heard that one. – Michael Jan 31 '16 at 11:55
  • If you are looking at the US stock market then I think prices still have a way to go down. On the weekly chart of the S&P500 the price has just made a lower high (in early November) and lower low in late January. This by definition is the start of a new downtrend. The UK FTSE and German DAX have been in downtrend since April 2014, and the Australian ASX200 hit a top in March 2014. I think there is more of the downtrends to continue. Wait for a higher low followed by a higher high before making any purchases. – Victor Feb 2 '16 at 10:00
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It might seem like the PE ratio is very useful, but it's actually pretty useless as a measure used to make buy or sell decisions, and taken largely on its own, pretty useless becomes utterly and completely useless.

Stocks trade at prices based on future expectations and speculation, so that means if traders expect a company to double its profits next year, the share price could easily double (there are reasons it might not increase so much, and there are reasons it could increase even more than that, but that's not the point). The Price is now double, but the Earnings is still the same, so the PE ratio is double, and this doubling is based on something some traders know, or think they know, but other traders might not know or not believe!

Once you understand that, what use is a PE ratio really? The PE ratio of a company might be low because it is in a death spiral, with many traders believing it will report lower and lower profits in years to come, and the lower the PE ratio of a given company gets probably, relatively, the more likely it is to go bust!

If you buy a stock with a low PE ratio you must do so because you feel you understand the company, understand why the market is viewing it negatively, believe that the negativity is wrong or over done, and believe that it will turn around.

Equally a PE ratio might be high, but be an excellent buy still because it has excellent growth prospects and potential even beyond what is priced in already! Lets face it, SOMEONE has been buying at the price that's put that PE ratio where is is, right? They might be wrong of course, or not! Or they might be justified now but circumstances might change before earnings ever reach the current priced in expectation. You'll know next year probably!

To answer your actual question... first you should now understand there is no such thing as a stock that is on sale, just stocks that are priced broadly according to the markets consensus on its value in years to come, the closest thing being a stock that is 'over sold' (but one man's 'over sold' is another man's train crash remember)... so what to actually look for? The only way to (on average) make good buy and sell decisions is to know about investing and trading (buy some books, I have 12), understand the businesses you propose to invest in and understand their market(s) (which may also mean understanding national and international economics somewhat).

  • Agree with general advice to research and understand the businesses you invest in, but disagree PE ratio is worthless. If nothing else it is a wonderful screening filter for a number of investment cases, including buying on the dips. In itself, it only indicates what the market thinks is the future direction of the company, but the market can have very different goals than you. Only you can determine, through research, if it means "on sale" because the long term potential of the company is not harmed when the market thinks it is. This is generally called value investing. – davmp Jan 31 '16 at 14:56
  • @davmp Please be careful, I said "not very useful" and "pretty useless as a measure used to make buy or sell decisions", not "worthless". The PE ratio has meaning, and therefore analytical value, it is an indicator of confidence of maintaining earnings, but if you make buy and sell decisions based on the PE ratio all you are doing is letting yourself be lead by the market (be it directly or inversely). PE ratios have nothing to do with value investing, a value investing strategy could mean buying or selling stocks with high and/or low PE ratios. – Michael Jan 31 '16 at 15:24
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    A value investor is almost never buying a stock with a high PE. Value investors actively seek stocks of companies that they believe the market has undervalued, which almost always implies a low PE ratio. – davmp Jan 31 '16 at 16:00
  • Or it may just mean to understand the trend - when the stock is downtrending, when it is uptrending and when it is not trending (going sideways). – Victor Feb 2 '16 at 21:29
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Don't invest. Keep cash. And wait till you see a crash in the price of some of your favorite blue chip stocks. But wait till the true bottom is in...you will know when is the right time as it will be obvious.

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    Nonsense. It's never obvious. When ever it is obvious the price already reflects that obviousness. Usually the price will so reflect (at least partially) BEFORE it is obvious, because there are always people who know more than you do. – Michael Jan 31 '16 at 11:43
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    Reasonable advice to not invest just because you have cash available, and to wait until you see a bottom. But agree with Michael that it's never obvious until you're well off the bottom, at which point you might have missed out on alot of the recovery. So you could keep powder dry in cash until you think we're at the bottom, not just buy at the first hint of "on sale", but calling that bottom is not easy. – davmp Jan 31 '16 at 15:01
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    The humor if this answer went over your heads. +1 for making me laugh. – gaefan Jan 31 '16 at 15:14
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    @Michael - it is obvious when a bottom has hit when you see a higher low and confirmed with a higher high on a weekly price chart - this is the definition of the start of an uptrend. – Victor Feb 2 '16 at 10:04

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