Thursday, October 19, 2006

Fools Born Every Minute

One of my more recent hobbies is to play the stock market, and just look around at what's out there.

People tell me constantly to be careful.

Careful about what? I truly believe that if you do your homework, and do the math, you will do ok, and do much better than putting your money in a bank. You won't necessarily pick all the right stock, but you will pick stocks good enough to beat the market, and so far, it is working for me.

Google would be a typical example of why people lose money. I've look at Google a few times and it has utterly amazed me that people fork money over for a share priced over $400 each. Truly, if I go to spend $400, I check out the competition and I take some time making a good purchase.

Well, here's what 3 minutes of homework on Google shares says to me:

Earnings last quarter, $2.36 per share, taking dilution into consideration.
Easiest estimate of annual earning, multiply by 4: 4 x $2.36 = $9.44
Check out the share price, $426.06.
Do a quick annual return calculation, $9.44/$426.06 x 100% = $2.22% annual return

Next, what is book price: $43.89, around 1/10th of the share price.

Well, I wouldn't buy it at $300, or $200, or even $150. I might consider it at around $100.

So, what happened in after hours trading? The stock went up $31. And some fool is predicting a $600/share price. It may do that, but that doesn't mean it is worth that.

Some people are in for a very hard landing.

1 comment :

Jose Anes said...

I am with you on this one.

Any investment is a risk, but you do it because you believe its potential for reward is greater than its potential for failure.

Money And Investing