SiegelCh9 - even lower than they should have been These...

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Siegel Ch. 9 The prices of stocks, especially technology stocks in the late ‘90’s and early 2000’s were very overvalued. People believed were caught up in the internet euphoria, believing that these companies would keep on growing forever. They dumped money into these companies that had very high P/E ratios, etc. The Nifty Fifty of the 1970’s Similar period where people bought stocks with high P/E ratios. The stocks then crashed. Conclusion: The stocks with the highest P/E ratio ended up doing the poorest while ones that were more reasonably prices did much better. Tech. companies had high ratios while companies like Coca Cola and Phillip Morris had more reasonable P/E ratios (they were
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Unformatted text preview: even lower than they should have been). These non-tech companies ended up doing much better. Justified Ratios for Individual Stocks How much should an investor pay for a large growth stock? 5 factors that determine a justified P/E ratio: 1. investor’s required rate or return 2. rate of earnings growth 3. the number of years that the earnings growth can be maintained. 4. the P/E ratio at maturity 5. the dividend yield Conclusion Diversification is the key to success. No good stock is worth even a 100+ P/E ratio. But should not be too cautious, people who after the 1970’s bubble said they would never pay for a stock above a P/E ratio of 30 have missed many winners....
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