Modified: November 2, 2006

Simplicity of the SSGSimplicity of the SSG

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Our instructors and assistants are all volunteers.Questions are always welcome.

WelcomeWelcome

Always do your own research!

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CreditsCredits

C. H. Hodgkin, from a note on the I-Club-List June, 2005.

This material is ©copyrighted and may be used for BetterInvesting educational purposes only.

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Annual High and Low PriceAnnual High and Low Price

We can look historically at a stock's price performance, especially it's high and low prices each year

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Price Chart on the SSGPrice Chart on the SSG

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Historical Earnings Per Share (EPS)Historical Earnings Per Share (EPS)

We can look historically at a stock's earnings per share (EPS)

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EPS Chart on the SSGEPS Chart on the SSG

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Calculate High and Low PE RatioCalculate High and Low PE Ratio

From high price, low price, and earnings we use

simple arithmetic to calculate two more numbers:

High PE ratio is high price divided by EPSLow PE ratio is low price divided by EPS

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High and Low PE Chart on the SSGHigh and Low PE Chart on the SSG

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Formula for PE RatioFormula for PE Ratio

The formula is PE = Price / Earnings

By simple algebra, we re-work the formula to read: Price = PE x Earnings

Substitution gives two similar formulas:High Price = High PE x EarningsLow Price = Low PE x Earnings

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Predicting High and Low PricesPredicting High and Low Prices

Ergo, if we project what the earnings will be in five years…

and can project what the high and low PE ratios will be in five years…

Then, we can project what the high and low prices will be for the next five years

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Stock RequirementsStock Requirements

What this requires is that we select stocks that: 1. We think we can project the earnings in five years with

reasonable accuracy. Our assumption is that, if nothing else changes dramatically, a stock with a basically straight earnings line for the past ten years will continue to grow at approximately the same rate, so we can project its earnings in five years.

2. The PE ratios have been relatively consistent for the past five to ten years so we can predict that they will remain approximately the same for the next five years.

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In Conclusion…In Conclusion…

Now, of course there are complexities

But the core principle of the SSG is simplicity itself

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SummarySummary

Take the PE = Price / Earnings ratio and recast it to read Price = Earnings x PE

Then pick stocks where we have some confidence that the Earnings and PE values can be reasonably projected five years from now

Multiply and you have the price range over the next five years

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Now, isn't that simple?

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Contact InformationContact Information

Check our web site for our schedule of classes:

Southeastern Michigan Chapter BetterInvestingP.O. Box 251832West Bloomfield, MI 48325-1832

Phone: (248) 683-1005

www.BetterInvesting.org/chapter/semichwww.BetterInvesting.org/chapter/semich

E-mail me if you ever have any questions:SailRmann@comcast.net

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