Ask Colin

Even if they had a PE ratio, would it really matter, since the price of a speculative share is based on emotions rather than logic?

In general terms, investment is about the management of risk. A low PE ratio indicates one of two things. The company could be going broke. The other explanation is that the company is undervalued by the market. The value school of investing will focus on this second group because the relative cheapness of the company gives the investor a margin of safety.

 

Then again, if the company has no earnings it is, as you say, a speculation. The risk is high and the margin of safety is non-existent. In a bull market this can look like free money and many people mistake a bull market for brains. However, the piper has to be paid and the real test is when the speculative music stops. A bear market separates the men from the boys. Good luck.

Keyword: