Many physician investors enjoy buying and selling individual stocks as part of their investment strategy. By doing so, they know exactly where their money is going and can potentially enjoy handsome investment gains if they choose the right stocks. This being said, no one has a crystal ball. There is no guaranteed way of knowing with 100% accuracy which stocks will flourish and which will flounder.
Wall Street tycoons have spent decades trying to find a magic formula for stock selection. None exists. There are, however, some tools you can apply that will help you evaluate stocks for investing purposes.
As explained by The Motley Fool, the most important tool in determining the value of a stock is the price/earnings (P/E) ratio. This number is calculated by taking a company’s current stock price and dividing it by its most up-to-date earnings per share (EPS). A low P/E ratio is said to represent a good value or a bargain in the stock’s pricing and can often be taken as a signal to buy.
Wouldn’t it be nice if it were as simple as that? But it’s not. There are many one-off events that can cause a stock price to fluctuate up or down without giving you a clear picture of its actual value. There could be a recall of a product, layoffs, or many other disruptions in the progress of doing business.
To try to combat this, other tools are used by investors including price/sales (P/S) ratio, which takes the value of all the company’s outstanding shares and divides it by its annual revenue. And there is also price-to-book ratio, which is based on a company’s book value (ie, the company’s assets minus its liabilities) divided by its outstanding shares.
All these tools provide physician investors with a means of evaluating a stock using different perspectives in the hopes of incorporating potential disruptions in profits. The mathematical gymnastics can be a little intimidating, however. In the end, all the tools in the world can’t predict with certainty what the market will do next. The best you can do is find an investing club with which to collaborate, never overextend yourself in your stock investments, and enlist the help of a skilled financial advisor.
