4

I am totally new to finance and investing world, hence please bear my basic question.

I have a query on Ben's book The intelligent investor Page #115.

point #4 it says : The Investor should impose some limit on the price he will pay for an issue in relation to its average earnings over past 7 years. we suggest that this limit be set at 25 times such average earning, and not more than 20 times those of the last 12 months.

Does he mean that you should not pay more than $250, if we consider particular issue is having earning average of $250 for past 7 years.

Please guide.

Thanks

3

It talks about Price to Earnings ratio. Generally if the average P:E over 7 years is < 25, it is undervalued and one should buy. If the P:E > 25; it is expensive.

The P:E may not be the only [and right] indicator; quite a few new generation companies have very high P:E as these are growth sectors. Quite a few heavy weight old companies that have lost relevance in today's world can have lower P:E's

5

There is no dollar amount that he specifies in this point. The mathematical equation he gives could be formulated as: where the company earns $x per share over the last 12 months, don't pay more than $20*x for that share.

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