How To Select The Right Stocks At The Right Time(9)

Watching For Pitfalls(1)

Investors can easily be misled by popular myths about earnings.

Myth: You should buy stocks with low price-to-earnings (P-E) ratios.

The P-E ratio is a comparison of the stock's price to its annual earnings per share.

For example, a stock quoted at $50 a share with annual earnings of $5 per share has a P-E ratio of 10.

In other words, the stock is selling at 10 times its annual earnings.

Conventional wisdom says stocks with higher P-E ratios are overpriced and should be avoided.

But the truth is that the best stocks often have high — some would say ridiculous — P-E ratios when they start their big climbs.

And they continue having high P-Es throughout their advances.