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From my archives of about 30 years ago, I came across the following published once as the golden rule of trading. What do you think? Calculate the result of Price/Net Assets ratio multiplied by Price/Earnings ratio. If result is less than or equal to 10, BUY. If result is greater than or equal to 25, sell. I like rules that minimise the thinking effort.

There are many variations on this theme - some involving the dividend yield as well. All of them derive from the ideas on Benjamin Graham on value investing. The idea is to buy stocks with low ratios, because the market is undervaluing them and then sell them when the ratios become normal.

This one has a simple idea behind it - you are looking for stocks with a low PE ratio, with assets selling cheaply. So, an example might be a PE of 10 and a P/NAB of 1.

One of the reasons this is popular is that it seems to boil life down to a simple rule. As you say, you do not have to think much. This is very seductive. However, it is also dangerous to stop thinking in the markets. Life is simply not so simple.

A PE of 10 is fine. But what if another company had a PE of 30 and a P/NAB of 0.3. Its multiplied ratio would be even lower, but it is hardly cheap. Such a situation might be a company with low physical assets like an advertising agency. You see, you must always look behind these simple ratios. Use them as a coarse filter, but never as an excuse to avoid thinking.

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