If you are going to buy and own expensive shares, you must be very confident that high rates of growth can continue for a long time into the future. Since no one can predict the future accurately, you need to protect yourself by not paying too high a price for shares.
Knowing how to value shares and understanding the crucial relationship between cash profits and interest rates are important. Know how much of a company's current share price is based on its current profits and how much is related to future profits growth.
Though profits growth is important in valuing shares, you should also know how to not pay too much for it.
High share prices can unravel very quickly when profits stop growing.
Companies which investors like tend to command very high valuations because they are growing turnover and profits rapidly, or are expected to do so Their shares will have very high multiples of profits and cash flows and very low yield attached to them.
This can persist for a long time but the dangers for investors of owning expensive or highly-rated shares can be significant when profits stop growing.
Investors in these shares may often lose a large amount of their investment and learned a brutal lesson of the high risks of owning expensive or highly-rated shares. This experience has been repeated countless times in the past and will surely happen many times again int he future.
No comments:
Post a Comment