How can we, as small investors, figure out the proper price-earnings ratios for stocks in which we are interested? To begin with, we should know something about the comparative status of various stock groups or industry classifications. If, for instance, you know that chemical stocks are generally given multipliers of 20 to 30, then the first step is to determine the status of the company in question as a basis for allotting it a place between the lower limit of 20 and the upper limit of 30. Or, for another in-stance, if aircraft stocks are generally accorded 10 to 17 times earnings, then securities of this classification should be evaluated accordingly, unless some exceptionally well-situated issues should deserve higher multipliers due, say, to their heavy engagement in electronics or outer-space exploration.

Price-earnings ratio is a much more realistic standard of measurement. Since every business is out to make money, it seems only logical to determine the price of a stock on the basis of the amount of money the company is able to learn, The general practice is to price a stock on the basis of a company’s latest twelve-month earnings multiplied by a figure which varies _de-pending on the market appraisal of a. particular situation. Some stocks are evaluated as low as 4 or even 3 times earnings, while others as high as 30, 40, 50 or even more times.
The 425 industrial stocks composing the Standard & Poor index are selling at an average of 19 or so times their latest twelve month earnings. The more the market values a certain stock, the higher it places its multiplier, and vice versa.
If you have some idea about the kind of multiplier the market is likely to accord a certain stock, you should be able to get into the situation at a profitable level. The question is, of course, how?
Generally speaking, the 19 or so times earnings for Standard & Poor’s industrial stocks is undoubtedly high, compared with 12 to 15 times earnings for the inflationary period of 1954-57. Historically, the average ranged from a low of 7.4 in October 1906 to a high of 21.5 in May 1960. Some conservative-minded_ investors shudder at anything that violates the traditional rule of thumb that holds a stork should sell at approximately 10 times annual earnings
To the majority of today’s investors, however, this traditional standard of measurement is a yardstick of bygone days. To them, it is as outdated as old-time companies whose high-failure rate made stockholders insist on an annual yield of 6 per cent for their risk. In order for a company to pay a 6 per cent dividend, it had to earn 10 per centhence the 10-times-earnings yardstick. This was, of course, before unemployment compensation, before the Employment Act of 1946 and before many other welfare economies of the Roosevelt and Truman administrations. The nation’s economic structure changed long ago. The vastly changed fundamental environment apparently accounts for the average investor’s willingness to buy many stocks at prices which are con-sidered high by the traditional standard.

To wait for a little confirmation through increased price and volume in a stock is one thing; to wait final confirmation in the form of news announcement is quite another.

You are more likely to lose money if you insist on not buying until good news is officially confirmed. That’s why the Wall Street adage says “Sell on good news.”
Why do professionals sell on good news? Because, in the words of William A. Doyle of the highly popular The Daily Investor, “many other people (mostly non-professional) will jump in to buy the stock on the good news and they will sell out at a good price.”
“Also,” continues Mr. Doyle, “good news often leaks out and gets around before it is formally announced. If the people who have advance knowledge of the news do a lot of buying, that will often send the price of the stock up. Then, if they and others sell when the good news is official, the price of the stock may dip.”

The growth stock concept is well entrenched, with the great majority of investors long having recognized growth stocks as a major type of investment opportunity. Everybody loves a true growth stock. Other things being equal, a growth stock is definitely preferred to a nongrowth stock. Generally, you are expected to pay some premium for a growth stock. The important think is not to overpay for it. Also, you should subject a growth stock to the same rigid standards of scrutiny as you would any other stock you buy.
Nothing but the most exceptional cases should induce you to buy into companies without a solid record of growth. Avoid companies which are largely based on expectations or “projected” growth. Even a good record of growth in the past is not necessarily necessarily indicative of its future trend.
Still, basic data is important. Perhaps the single most revealing and surest yardstick of industry or corporate growth is profit margin. A widening profit margin always means better cost control, lower production costs and other management features which are classic characteristics of a growth company.
This and other “fundamentals” about a company or industry are what make a situation basically attractive. Beginners would do well to get involved only with situations sound in “fundamentals,” though a brilliantly timed purchase of even a basically unattractive stock might work out well.
The market is always in the habit of overbuying stocks of

favored groups or overselling shares of “deflated” industries. It pays not to overreach for or chase after any stock. There is nothing permanent in the growth of any industry group. Just as yesterday’s glamour stocks have become today’s wallflowers, so today’s favorites could be tomorrow’s laggards. The glamour of uraniums, airlines, oils, etc., came and went. We have just witnessed the rise and fall, temporarily at least, of electronics, bowl-ing and boating” No one knows how long the market’s current favorites such as toys, department stores, banks, insurance com-panies, and savings and loan associations will _be able to occupy the center of the market spotlight.

Another system for uncovering growth stocks is devised by John S. Herold, Inc.’s America’s Fastest Growing Companies, a monthly publication which concentrates on companies which are compounding their earning power and value at the highest rates. It is a good place to seek young but solid companies with excellent growth potential.
The publication’s selection of companies is based on growth in net income per common share, which is undoubtedly the most reliable yardstick of measuring a company’s real growth. Of 5,000 companies screened, only those companies recording the largest and most consistent year-to-year gains in earnings have been selected. An additional requirement is that every company, when first listed, show an uninterrupted gain in annual profits for three years immediately preceding.
Why a minimum of three years? Because any lesser period would be far too short to be indicative of any reliable growth trend. Stock buyers might be deceived by the temporary prosperity of a youthful growth company.

You may have heard of a dancer-turned-investor named Nicholas Darvas who startled Wall Street with his How I Made $2,000,000 in the Stock Market. The book distinguished itself in the simplicity of its approach. He dealt only in stocks which were “in tune with the jet age,” growth stocks. He selected only those which appeared to be developing trading activity and strength. No attempt was made to buy a stock at the bottom; instead, he took action only after it had begun to rise.
He watched his selected stocks and kept charts, which consisted of a series of “boxes.” If a stock should move up to a higher box and stay there, he would buy it. If it should move down to a lower box, he would sell. For instance, if a stock had fluctuated in a 55 to 60 range, that would be its first box. Then, if the stock should move out of that range to fluctuate in a range of 60 to 67, that would be his next box. If the stock should demonstrate its ability of staying in that box, he would buy it, and place a stop-loss order to sell a few points below the buying price. If the stock should rise, he would raise the stop-loss price. If it should fall through the stop-loss price, he would be automatically sold out.
Mr. Darvas called his method “Techno-fundamentalism,” but it is essentially a technical approach based on the idea that market is its own indicator. It is “fundamentalism” only in the sense that he used a daily market average of industrial stocks as a basic indicator of the stock market trend. Stock prices may indeed be determined by fundamental values in the long run, but he concerned himself only with what the market was doing at the moment.
Behind this seemingly rather simple approach is a much deeper theory which sees the price of any stock as a reflection, at a given moment, of the sum total of hopes and fears of investors and speculators. And this reflection is considered registered in the price of that stock at any given moment. The price of the stock itself may then serve as a stimulant for buying or selling.

The market is not a one-way affair. This is true not only of the market as a whole, but of individual issues. That is not to say that what goes up will inevitably go down; quite a few stocks have registered one new high after another without much interruption.
For the overwhelming majority of stocks, however, the opportunities provided by market swings are too frequent to pass up. The difference between the high and the low even in short-term swings often equals or exceeds a year’s growth.
The opportunities are even greater if you know how to capital-in on what I call “market disorder,” which is created by unusually sharp setbacks. When the market suffers a series of severe reversals, as when it breaks through a psychologically important support zone like the 600, as measured by Dow-Jones Industrial Average, people often get panicky and sell indiscriminately. This creates excellent opportunities to buy favored issues or switch into them from issues you want to get rid of. Though it may entail a small loss, plus brokers’ commissions, good stocks bounce back fast during a market rally which would more than cover the loss suffered in the wrong situation.