Category: MoneyCrashers

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Price Earnings P/E Ratios – How to Value a Stock

pe1 The price-to-earnings ratio, commonly known as the P/E ratio, is one of the most widely used valuation metrics. It is a basic measure used to compare different investments or the same investment over different periods of time, and it’s simple to calculate.
 
The P/E ratio is most commonly used for a quick comparison between two securities to see how Wall Street values them, with a higher P/E suggesting that future earnings are more likely. Dividing the common stock market share price (numerator) by earnings per share (denominator) produces the ratio. For example, a stock with a market price of $15.00 and earnings of $1.00 per share would have a P/E ratio of 15 (15/1=15).
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P/E ratios can be calculated on past or realized earnings, projected earnings, or a combination of each. Earnings are sometimes adjusted to exclude extraordinary events, since they are unlikely to repeat. When considering P/E ratios, it is important to understand if and how earnings have been adjusted and whether they are actuals or projections.
Examples of different P/E types include:

Trailing or Current P/E

Analysts use earnings for the most recent 12-month period. As each quarter is completed, the oldest quarter’s earnings per share is dropped and the most recent quarter is added to the total.

Projected or Forward P/E

The divisor is the projected or estimated earnings per share over the next 12 months. The estimate may be that of a single analyst or the consensus estimate from a group of analysts. It is important to know the identity and qualifications of the analysts providing an estimate to determine whether it is realistic.

Combined or Mixed P/E

Some analysts use a combination of the two last quarters of actual earnings plus the first two quarters of projected earnings as the divisor.
 
Regardless of which type of P/E you use, it’s important to be consistent when comparing period to period or one company’s stock with that of another. Since analysts have broad discretion in choosing what numbers they use to calculate P/E ratios, you should not be surprised that the ratios commonly vary from analyst to analyst or firm to firm. Be careful that you don’t compare apples to oranges.
 
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How to Cope with Divorce and Move On

divorcing-coupleAccording to government statistics, there were more than 4.2 million divorces between the years of 2006 and 2011, about half the rate of marriages in the same period. Statistically, about 40% of first marriages end in divorce, while almost three-quarters of third marriages fail.
 
Divorce is often costly, and can be devastating for all parties involved – partners, children, parents, and grandparents. According to the Holmes-Rahe Social Readjustment Rating Scale, only the death of a spouse is a more traumatic, stress-causing event; divorce is more stressful than separation, a jail term, the death of a close family member, or a personal injury or serious illness. Fortunately, time does heal all wounds, and understanding the healing process can help speed the path to recovery.

Going Through the Grief of Divorce

Many counselors believe that divorcees go through the five stages of grief that are also experienced after a loved one dies. The stages, first enumerated by Elisabeth Kübler-Ross in her book “On Death and Dying,” include:

Denial

. This may start while your marriage is still intact. It’s a defense mechanism to cope with pain, usually because you can’t believe divorce is happening to you.

Anger

. It’s natural to feel furious with yourself for being a fool, or your spouse for rejecting you, but uncontrolled anger can make a bad situation worse, especially if there are children involved. Unfortunately, many attorneys capitalize on this anger to extend divorce proceedings, or gain a negotiating advantage. While it’s natural to want to punish your spouse, it’s ultimately counter-productive to a satisfactory conclusion that allows you to move on and rebuild your life.

Bargaining

. This is the stage where you try to “fix what happened,” to go back and try again without the prior mistakes. It’s rarely logical, and inevitably unsuccessful. Divorces are the culmination of dissatisfaction over many issues and many months, the likelihood of resolving them quickly or fixing what happened is not high.

Depression

. The reality of divorce is that there are significant losses experienced by everyone involved: the presumed-happy future, financial security, affection, and love. As a consequence, it’s natural to feel sad and abandoned, to even withdraw from day-to-day life. When depression becomes significant, or begins to affect your children, it’s time to seek outside help.

Acceptance

. The last stage of grief occurs when you finally accept that your marriage is over, and you put the hopes and dreams you shared with your former spouse behind you. While you may still feel anger, guilt, or depression from time to time, the episodes wane in intensity and frequency, signaling that you’re ready to pick up the pieces and move on. This is also when you recognize your own strength to set a new path to happiness. You gain a level of indifference about your former spouse, having separated your personal lives. Even when you have children together, you learn to co-parent without rehashing old hurts or using the children as a weapon against one another.
 
To progress through the stages of grief, eventually achieving acceptance and even forgiveness, you must reconcile certain feelings before moving forward and rebuilding your life. Dr. Phil McGraw, the widely respected psychiatrist who gained fame as Oprah Winfrey’s adviser, details the variety of emotions that most people feel during and after a divorce in his bestselling book “Real Life: Preparing for the 7 Most Challenging Days of Your Life.”
 
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Too Much Stuff – 6 Tips to a Happier, Sustainable Life

electronic-waste1Malcolm Forbes is credited with the phrase, “He who has the most toys wins the game.” According to a People magazine article written at the time of his death, his hobbies included the acquisition of wealth and “flaunting what it could buy.”
 
His memorial service featured displays of his vast collection of art, including antique model boats, toy soldiers, and manuscripts. Forbes owned eight homes around the world including a private island, 2,200 paintings, a 151-foot yacht, and a Boeing 727. He also owned more Russian Imperial Faberge eggs than the Russian government. Since his death, Mr. Forbes’ philosophy has been attacked by both preachers and pundits, some of whom cited the Bible’s question: “What good will it be for a man if he gains the whole world, yet forfeits his soul?”

The Impact of Accumulating Stuff

Ironically, studies suggest that the pursuit of material possession makes us happier than its actual acquisition. Dr. Marsha L. Richins, a professor of marketing at the University of Missouri, says that materialistic consumers derive more pleasure from desiring products than from actually owning them. In his book “Stumbling on Happiness,” psychologist Daniel Gilbert says that satisfaction and joy from owning an object quickly wanes, an effect psychologists call habituation and economists call “declining marginal utility.”

Materialism – Socially Destructive and Self-Destructive

A series of studies published in the journal Motivation and Emotion in July 2013 indicates that as people acquire more, their sense of well-being diminishes. As they acquire less, it rises. Another study published in the December 2013 issue of the Journal of Consumer Research states that materialism fosters social isolation, and vice versa. The relationship creates a vicious cycle – the more lonely you feel, the more likely you are to seek possessions, even as a greater amount of possessions crowds out your relationships.
 
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Does Gold Belong In Your Investment Portfolio?

GOLD – The MAGIC METAL
Humankind’s fascination with gold can be dated back as far as 4000 B.C., and for much of our collective history, possession of gold was a sign of wealth and status restricted solely to governments and nobility. Eventually, the first gold coins are believed to have initially financed long-distance trading around the world – around 500 B.C., Darius the Great of the Persian Empire is thought to have minted the first coin, the “daric,” to facilitate the expansion of his empire and the needs of his army as it moved into foreign territories.
 
Many countries came to use gold and silver coins as currencies for centuries. However, during the worldwide depression of the 1930s, every industrialized nation ceased using the gold standard, subsequently severing the close link between the value (and quantity) of gold and the value of money.
 
Despite this, gold continues to be a sought-after commodity due to its scarcity and reputation as a hedge against monetary or societal collapse. But does it deserve a place in your portfolio?

Gold in Modern Civilization

Today, gold is available in several forms, including the following:

Historic Collectors’ Coins

Minted as currency by many countries, these coins are now collected as much for their numismatic value as their gold content. Like other collector’s items, such as stamps and fine art, only experts, or those who have access to experts, should consider this investment.

Collector Gold Coins

Issued by countries and commercial businesses, these coins are priced according to their weight and purity. The more popular coins are the Canadian Maple Leaf, the South African Krugerrand, and the American Eagle.

Gold Bars

Available by weight of one gram, one ounce, ten ounces, and one kilo (32.15 ounces) generally with 99.99% purity, bars are also referred to as “gold bullion.” A standard gold ingot like that found in the U.S. Fort Knox Depository, and commonly depicted in movies, is seven inches long, three and five-eighths inches wide, and one and three-quarters inches high, and weighs 27.5 pounds. At current market prices, an ingot would have a value in excess of $500,000, much too expensive to support an active investor market.

Common Stock of a Gold Mining Company

Ownership in a company whose sole business is the search and discovery of gold, and the potential value of the element in the resources not yet produced is a common type of gold investment.

Gold Exchange Traded Fund (ETF)

A gold ETF does not typically hold gold as a commodity, but tracks its price with a combination of financial derivatives.

Gold Exchange Traded Notes (ETN)

A gold ETN is a debt security that’s value fluctuates based upon the price of the underlying index – in this case, the price of gold. While this investment includes credit risk, the benefit of being taxed as a long-term capital gain rather than paying ordinary interest exists with this vehicle.
 
Gold is not money or currency, but an investment which must be converted into money before it can be used to purchase other assets. Of course, individuals and businesses can agree to exchange an amount of gold for a service or product – as was done for centuries – but it would require negotiation about the relative value of each, a timely and potentially risky process for both parties.
 
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