You don’t buy a stock based on PE alone. I read the entire balance sheets of a stock, recent news, footnotes of financial statements, before I buy. COP ($62.xx/share) was an exception, since I’d paid Zeal for the research already.
If one of the underlying ratios is out of whack, like the debt/equity ratio, or PE ratio, I eliminate that stock.
Value investors only buy stocks with PEs under 10.
The PE ratio test led me to discard all those tech stocks in 1999. It’s a way of telling if you are paying too much or very little for a stock.
PSA might be a great company. It has little debt. It should be $14/share. Why pay $35/share, when it’s worth only $14/share? Stocks with high PEs cannot disappoint – one little thing happens, or the market starts correcting, and the selloff will start.
When you buy high PE stocks, you are playing the momentum game. You have to know when to get out. Perhaps you have a stop loss in place. But how much more overvalued can this overvalued stock get? How high can this pyramid scheme go? There is more downside than upside.
As far as the COP Nov 60 calls, I didn’t know how to do that. It was a better way to buy COP. I will make less money than the people who bought calls, but I won’t lose money from making some dumb entry mistake. I need to work in my comfort zone.
